SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
Commission file number 0-28538
Titanium Metals Corporation
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
------------------------------------ ---------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240
-----------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($.01 par value) New York Stock Exchange
------------------------------- -------------------------------------------
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
6 3/4% Series A Convertible Preferred Stock ($.01 par value)
------------------------------------------------------------------
(Title of class)
Indicate by check mark:
If the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes __ No X
If the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes __ No X
Whether the Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days. Yes X No _
If disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K __
Whether the registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated
filer __ Accelerated filer X Non-accelerated filer __.
Whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes __ No X
The aggregate market value of the 25,185,912 shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of June 30, 2005 approximated
$357.6 million. There are no shares of non-voting stock outstanding. As of March
10, 2006, 73,725,762 shares of common stock were outstanding.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
Forward-Looking Information
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and in Item 1
- Business, Item 1A - Risk Factors, Item 2 - Properties, Item 3 - Legal
Proceedings and Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"), are forward-looking statements
that represent management's beliefs and assumptions based on currently available
information. Forward-looking statements can generally be identified by the use
of words such as "believes," "intends," "may," "will," "looks," "should,"
"could," "anticipates," "expects" or comparable terminology or by discussions of
strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurance that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly affect expected results. Actual future results could differ
materially from those described in such forward-looking statements, and the
Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Among the factors that could cause actual results to differ
materially are the risks and uncertainties discussed in this Quarterly Report,
including risks and uncertainties in those portions referenced above and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission ("SEC") which include, but are not limited to, the
cyclicality of the commercial aerospace industry, the performance of aerospace
manufacturers and the Company under their long-term agreements, the existence or
renewal of certain long-term agreements, the difficulty in forecasting demand
for titanium products, global economic and political conditions, global
productive capacity for titanium, changes in product pricing and costs, the
impact of long-term contracts with vendors on the ability of the Company to
reduce or increase supply, the possibility of labor disruptions, fluctuations in
currency exchange rates, fluctuations in the market price of marketable
securities, control by certain stockholders and possible conflicts of interest,
uncertainties associated with new product or new market development, the
availability of raw materials and services, changes in raw material prices and
other operating costs (including energy costs), possible disruption of business
or increases in the cost of doing business resulting from terrorist activities
or global conflicts, the potential for adjustment of the Company's deferred
income tax asset valuation allowance and other risks and uncertainties. Should
one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected.
PART I
ITEM 1: BUSINESS
General. Titanium Metals Corporation ("TIMET" or the "Company") was
originally formed in 1950 and was incorporated in Delaware in 1955. TIMET is one
of the world's leading producers of titanium melted and mill products. The
Company is the only producer with major titanium production facilities in both
the United States and Europe, the world's principal markets for titanium
consumption. TIMET is currently the only major producer of titanium sponge, a
key raw material, in the United States.
Titanium was first manufactured for commercial use in the 1950s. Titanium's
unique combination of corrosion resistance, elevated-temperature performance and
high strength-to-weight ratio makes it particularly desirable for use in
commercial and military aerospace applications where these qualities are
essential design requirements for certain critical parts such as wing supports
and jet engine components. While aerospace applications have historically
accounted for a substantial portion of the worldwide demand for titanium, the
number of non-aerospace end-use markets for titanium has expanded substantially.
Today, numerous industrial uses for titanium exist, including chemical plants,
power plants, desalination plants and pollution control equipment. Demand for
titanium is also increasing in emerging markets with such diverse uses as
offshore oil and gas production installations, automotive, geothermal facilities
and architectural applications.
TIMET's products include titanium sponge, melted products, mill products
and industrial fabrications. The titanium industry is comprised of several
manufacturers that, like TIMET, produce a relatively complete range of titanium
products and a significant number of producers worldwide that manufacture a
limited range of titanium mill products.
The Company's long-term strategy is to maximize the value of its core
aerospace business while also developing new markets, applications and products
to help reduce its historical dependence on the commercial aerospace industry.
In the near-term, the Company continues to focus on maintaining a lean cost
structure, managing its raw material requirements, improving the quality of its
products and processes and taking other actions to maximize its cash flow and
profitability.
Industry. The Company develops certain industry estimates based on its
extensive experience within the titanium industry as well as information
obtained from publicly available external resources (e.g., United States
Geological Survey, International Titanium Association and Japan Titanium
Society). The Company estimates that it accounted for approximately 18% and 19%
of worldwide industry shipments of titanium mill products in 2005 and 2004,
respectively, and approximately 8% and 10% of worldwide titanium sponge
production in 2005 and 2004, respectively. The following table illustrates the
Company's estimates of aggregate titanium industry mill product shipments during
2005 and 2004:
Year ended December 31, %
----------------------------------
2005 2004 change
---------------- -------------- -----------
(metric tons)
Mill product shipments to:
Commercial aerospace sector 24,000 20,900 +15%
Military sector 6,200 4,700 +32%
Industrial sector 35,600 32,300 +10%
Emerging markets sector 2,700 2,300 +17%
---------------- --------------
Aggregate mill product shipments to all sectors 68,500 60,200 +14%
================ ==============
The titanium industry historically has derived a substantial portion of its
business from the commercial aerospace sector. Demand for titanium products
within the commercial aerospace sector is derived from both jet engine
components (e.g., blades, discs, rings and engine cases) and airframe components
(e.g., bulkheads, tail sections, landing gear, wing supports and fasteners). The
commercial aerospace sector has a significant influence on titanium companies,
particularly mill product producers such as TIMET.
The Company's business is more dependent on commercial aerospace demand
than is the overall titanium industry, as approximately 59% of the Company's
mill product shipment volume in 2005 was to the commercial aerospace sector,
whereas, as indicated by the above table, approximately 35% of the overall
titanium industry's shipment volume in 2005 was to the commercial aerospace
sector.
The cyclical nature of the commercial aerospace industry has been the
principal driver of the historical fluctuations in the performance of most
titanium companies. Over the past 20 years, the titanium industry had cyclical
peaks in mill product shipments in 1989, 1997 and 2001 and cyclical lows in
1983, 1991, 1999 and 2003. Prior to 2004, demand for titanium reached its
highest level in 1997 when industry mill product shipments reached approximately
60,700 metric tons. However, since 1997, industry mill product shipments have
fluctuated significantly, primarily due to a continued change in demand for
titanium from the commercial aerospace sector. The Company estimates that
industry shipments approximated 60,200 metric tons in 2004 and 68,500 metric
tons in 2005. The Company currently expects 2006 total industry mill product
shipments to increase by only 5% to 10% as compared to 2005, due to tightness of
raw material supply.
The Airline Monitor, a leading aerospace publication, traditionally issues
forecasts for commercial aircraft deliveries each January and July. According to
The Airline Monitor, large commercial aircraft deliveries for the 1996 to 2005
period peaked in 1999 with 889 aircraft, including 254 wide body aircraft that
use substantially more titanium than their narrow body counterparts. Large
commercial aircraft deliveries totaled 650 (including 152 wide bodies) in 2005.
The following table summarizes The Airline Monitor's most recently issued
forecast (January 2006) for large commercial aircraft deliveries over the next
five years:
% increase (decrease)
Forecasted deliveries over previous year
----------------------------------- --------------------------------------
Year Total Wide bodies Total Wide bodies
------------------ -------------- ----------------- ---------------- ------------------
2006 840 193 29.2% 27.0%
2007 920 217 9.5% 12.4%
2008 985 259 7.1% 19.4%
2009 1,030 294 4.6% 13.5%
2010 1,030 314 - 6.8%
The latest forecast from The Airline Monitor reflects a significant
increase from earlier such forecasts, in large part due to record levels of new
orders placed for Boeing and Airbus models during 2005. Total order bookings for
Boeing and Airbus in 2005 were 2,109 planes. Expectations are that new orders in
2006 will be significantly lower than 2005; however, the strong bookings in 2005
have increased the order backlog for both Boeing and Airbus in support of this
increased forecast.
Deliveries of titanium generally precede aircraft deliveries by about one
year, although this varies considerably by titanium product. This correlates to
the Company's cycle, which historically precedes the cycle of the aircraft
industry and related deliveries. Although persistently high oil prices have had
an adverse impact on the commercial airline industry, global commercial airline
traffic increased in 2005 compared to 2004. The Company estimates that 2006
industry mill product shipments into the commercial aerospace sector will
increase 15% to 20%, as compared to 2005.
Wide body planes tend to use a higher percentage of titanium in their
airframes, engines and parts than narrow body planes. Newer models of planes
tend to use a higher percentage of titanium than older models. Newer wide body
models such as the Airbus A380 and the Boeing 787 Dreamliner are expected to use
an even greater quantity of titanium than previous wide body models. See further
discussion of titanium usage for these new planes in "Business - Markets and
customer base."
Titanium shipments into the military sector are largely driven by
government defense spending in North America and Europe. Military aerospace
programs were the first to utilize titanium's unique properties on a large
scale, beginning in the 1950s. Titanium shipments to military aerospace markets
reached a peak in the 1980s before falling to historical lows in the early 1990s
after the end of the Cold War. In recent years, titanium has become an accepted
use in ground combat vehicles as well as in Naval applications. The importance
of military markets to the titanium industry is expected to continue to rise in
coming years as defense spending budgets increase in reaction to terrorist
activities and global conflicts.
Several of today's active U.S. military programs, including the C-17,
F/A-18, F-16 and F-15 are expected to continue in production through the end of
the current decade. However, a recent Quadrennial Defense Review (QDR)
recommends that the US Air Force stop procurement of the C-17 with the 180
planes it now has on order, but this recommendation still must go through the
federal budget process. Without further orders, the C-17 production line will
close in 2008.
In addition to the established C-17, F/A-18 and F-16 programs, new U.S.
programs offer growth opportunities for increased titanium consumption. The
F/A-22 Raptor was given full-rate production approval in April 2005. According
to The Teal Group, a leading independent aerospace publication, the U.S. Air
Force would like to purchase 381 aircraft, but the Department of Defense is now
planning for only 179. However, additional F/A-22 Raptors may be manufactured
for sale to foreign nations.
In October 2001, Lockheed-Martin Corporation was awarded the contract for
construction of the F-35 Joint Strike Fighter ("JSF"). The JSF is expected to
enter low-rate initial production in late 2006, with delivery of the first
production aircraft in 2009. Although no specific delivery patterns have been
established, procurement is expected to extend over the next 30 to 40 years and
to include as many as 3,000 to 4,000 planes, including sales to foreign nations.
European military programs also have active aerospace programs offering the
possibility for increased titanium consumption. Production levels for the Saab
Gripen, Eurofighter Typhoon, Dassault Rafale and Dassault Mirage 2000 are all
forecasted to remain steady through the end of the decade.
Utilization of titanium on military ground combat vehicles for armor
applique and integrated armor or structural components continues to gain
acceptance within the military market segment. Titanium armor components provide
the necessary ballistic performance while achieving a mission critical vehicle
performance objective of reduced weight. In order to counteract increased threat
levels, titanium is being utilized on vehicle upgrade programs in addition to
new builds. Based on active programs, as well as programs currently under
evaluation, the Company believes there will be additional usage of titanium on
ground combat vehicles that will provide continued growth in the military market
sector. In armor and armament, the Company sells plate and sheet products for
fabrication into applique plate for protection application of the entire ground
combat vehicle as well as the primary vehicle structure.
Since titanium's initial applications, the number of end-use markets for
titanium has significantly expanded. Established industrial uses for titanium
include chemical plants, power plants, desalination plants and pollution control
equipment. Rapid growth of the Chinese and other Southeast Asian economies has
brought unprecedented demand for titanium-intensive industrial equipment. In
November 2005, the Company entered into a joint venture with XI'AN BAOTIMET
VALINOX TUBES CO. LTD. ("BAOTIMET") to produce welded titanium tubing in the
Peoples Republic of China. BAOTIMET's production facilities will be located in
Xi'an, China, and production is expected to begin in early 2007.
Titanium continues to gain acceptance in many emerging market applications,
including automotive, energy (including oil and gas) and architecture. Although
titanium is generally higher cost than other competing metals, in many cases
customers find the physical properties of titanium to be attractive from the
standpoint of weight, performance, longevity, design alternatives, life cycle
value and other factors. The Company continues to explore opportunities in these
emerging market applications through marketing initiatives, research and
development and proprietary alloys designed to provide more cost effective
alternatives for these markets.
Although the Company estimates that emerging market demand presently
represents only about 4% of the 2005 total industry demand for titanium mill
products, the Company believes emerging market demand, in the aggregate, could
grow at double-digit rates over the next several years. The Company continues to
actively pursue these markets and was able to grow its mill product shipments
into emerging markets by more than 50% during 2005 as compared to 2004.
Beginning in 2005, the Company no longer includes armor and armament related
sales as part of its emerging markets sector, as titanium usage has become
widely accepted for such applications. Accordingly, all such sales are now
included in the Company's military sector and all prior periods have been
restated to conform to this presentation.
The automotive market continues to be an attractive emerging market due to
its potential for sustainable long-term growth. TiMET Automotive is focused on
developing and marketing proprietary alloys and processes specifically suited
for automotive applications. Titanium is now used in several consumer car
applications as well as in numerous motorcycles. At the present time, titanium
is primarily used for exhaust systems, suspension springs, engine valves,
connecting rods and turbocharger compressor wheels in consumer and commercial
vehicles. In exhaust systems, titanium provides for significant weight savings,
while its corrosion resistance provides life-of-vehicle durability. In
suspension spring applications, titanium's low modulus of elasticity allows the
spring's height to be reduced by 20% to 40% compared to a steel spring, which,
when combined with the titanium's low density, permits 30% to 60% weight savings
over steel spring suspension systems. Titanium engine components provide
mass-reduction benefits that directly improve vehicle performance and fuel
economy. The application of titanium to turbocharger compressor wheels is part
of a solution to meet U.S. and European Union government-regulated diesel engine
emissions requirements. TIMETAL proprietary alloys provide cost effective
optimized performance for the various target applications. The decision to
select titanium components for consumer car, truck and motorcycle components
remains highly cost sensitive; however, the Company believes titanium's
acceptance in consumer vehicles will expand as the automotive industry continues
to better understand the benefits titanium offers.
The oil and gas market utilizes titanium for down-hole logging tools,
critical riser components, fire water systems and saltwater-cooling systems.
Additionally, as offshore development of new oil and gas fields moves into the
ultra deep-water depths, market demand for titanium's light-weight,
high-strength and corrosion-resistance properties is creating new opportunities
for the material. The Company has a group dedicated to developing the expansion
of titanium use in this market and in other non-aerospace applications.
Products and operations. The Company is a vertically integrated titanium
manufacturer whose products include:
(i) titanium sponge, the basic form of titanium metal used in titanium
products;
(ii) melted products (ingot, electrodes and slab), the result of melting
sponge and titanium scrap, either alone or with various alloys;
(iii) mill products that are forged and rolled from ingot or slab,
including long products (billet and bar), flat products (plate, sheet
and strip) and pipe; and
(iv) fabrications (spools, pipefittings, manifolds, vessels, etc.) that are
cut, formed, welded and assembled from titanium mill products
During the past three years, all of TIMET's net sales were generated by the
Company's integrated titanium operations (its "Titanium melted and mill
products" segment), its only business segment. Business and geographic financial
information is included in Note 21 to the Consolidated Financial Statements.
Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in TIMET's sponge
production involves the combination of titanium-containing rutile ores (derived
from beach sand) with chlorine and petroleum coke to produce titanium
tetrachloride. Titanium tetrachloride is purified and then reacted with
magnesium in a closed system, producing titanium sponge and magnesium chloride
as co-products. The Company's titanium sponge production facility in Henderson,
Nevada incorporates vacuum distillation process ("VDP") technology, which
removes the magnesium and magnesium chloride residues by applying heat to the
sponge mass while maintaining a vacuum in the chamber. The combination of heat
and vacuum boils the residues from the sponge mass, and then the mass is
mechanically pushed out of the distillation vessel, sheared and crushed, while
the residual magnesium chloride is electrolytically separated and recycled.
Titanium ingot is a cylindrical solid shape that, in TIMET's case, weighs
up to 8 metric tons. Titanium slab is a rectangular solid shape that, in TIMET's
case, weighs up to 16 metric tons. Each ingot or slab is formed by melting
titanium sponge, scrap or both, usually with various other alloys such as
vanadium, aluminum, molybdenum, tin and zirconium. The melting process for ingot
and slab is closely controlled and monitored utilizing computer control systems
to maintain product quality and consistency and to meet customer specifications.
In most cases, TIMET uses its ingot and slab as the starting material for
further processing into mill products. However, it also sells ingot, electrodes
and slab to third parties. Titanium scrap is a by-product of the forging,
rolling, milling and machining operations, and significant quantities of scrap
are generated in the production process for finished titanium products and
components.
The Company sends certain products either to the Company's service centers
or to outside vendors for further processing before being shipped to customers.
The Company's customers either process the Company's products for their ultimate
end-use or for sale to third parties.
During the production process and following the completion of
manufacturing, the Company performs extensive testing on its products. The
inspection process is critical to ensuring that the Company's products meet the
high quality requirements of its customers, particularly in aerospace component
production. The Company certifies that its products meet customer specification
at the time of shipment for substantially all customer orders.
The Company currently is reliant on several outside processors (one of
which is owned by a competitor) to perform certain rolling, finishing and other
processing steps in the U.S., and certain melting and forging steps in France.
In France, the processor is also a joint venture partner in the Company's
70%-owned subsidiary, TIMET Savoie, S.A. ("TIMET Savoie"). During the past
several years, the Company has made significant strides toward reducing the
reliance on competitor-owned sources for these services, so that any
interruption in these functions should not have a material adverse effect on the
Company's business, results of operations, financial position or liquidity.
Distribution. The Company sells its products through its own sales force
based in the U.S. and Europe and through independent agents and distributors
worldwide. The Company's distribution system also includes eight Company-owned
service centers (five in the U.S. and three in Europe), which sell the Company's
products on a just-in-time basis. The service centers primarily sell value-added
and customized mill products, including bar, sheet, plate, tubing and strip. The
Company believes its service centers provide a competitive advantage because of
their ability to foster customer relationships, customize products to suit
specific customer requirements and respond quickly to customer needs.
Raw materials. The principal raw materials used in the production of
titanium ingot, slab and mill products are titanium sponge, titanium scrap and
alloys. The following table summarizes the Company's 2005 raw material usage
requirements in the production of its melted and mill products:
Percentage of total raw
material requirements
-----------------------------
Internally produced sponge 29%
Purchased sponge 25%
Titanium scrap 40%
Alloys 6%
-----------------------------
100%
=============================
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke. Rutile
ore is currently available from a limited number of suppliers around the world,
principally located in Australia, South Africa and Sri Lanka. The Company
purchases the majority of its supply of rutile ore from Australia. The Company
believes the availability of rutile ore will be adequate for the foreseeable
future and does not anticipate any interruptions of its rutile supplies.
However, there can be no assurance that the Company will not experience
interruptions.
Chlorine is currently obtained from a single supplier near the Company's
sponge plant in Henderson, Nevada. While the Company does not presently
anticipate any chlorine supply problems, there can be no assurances the chlorine
supply will not be interrupted. In the event of supply disruption, the Company
has taken steps to mitigate this risk, including establishing the feasibility of
certain equipment modifications to enable it to utilize material from
alternative chlorine suppliers or to purchase and utilize an intermediate
product which will allow the Company to eliminate the purchase of chlorine if
needed. Magnesium and petroleum coke are generally available from a number of
suppliers.
During 2005, the Company was the only major U.S. producer of titanium
sponge and one of only six major worldwide producers (the others are located in
Russia, Kazakhstan, the Ukraine and two in Japan). Additionally, there are two
smaller sponge producers located in China. However, the Company cannot supply
all of its needs for all grades of titanium sponge internally and is dependent,
therefore, on third parties for a substantial portion of its sponge
requirements. Titanium melted and mill products require varying grades of sponge
and/or scrap depending on the customers' specifications and expected end use.
Presently, TIMET and certain companies in Japan are the only producers of
premium quality sponge that currently have complete approval for all significant
demanding aerospace applications. Over the past few years, sponge producers in
Russia and Kazakhstan have progressed in their efforts to obtain approval for
the use of their sponge into all aerospace applications. This qualification
process is likely to continue for several more years. Historically, the Company
has purchased sponge predominantly from producers in Kazakhstan and Japan. In
September 2002, the Company entered into a sponge supply agreement, effective
from January 1, 2002 through December 31, 2007, which requires minimum annual
purchases by the Company. The Company has no other long-term sponge supply
agreements. Since 2000, the Company has also purchased sponge from the U.S.
Defense Logistics Agency ("DLA") stockpile; however, the DLA stockpile became
fully depleted during 2005. The Company expects to continue to purchase sponge
from a variety of sources during 2006.
The Company utilizes titanium scrap at its melting locations that is either
generated internally, purchased from certain of its customers under various
buyback arrangements or purchased externally on the open market. Such scrap
consists of alloyed and commercially pure solids and turnings. Internally
produced scrap is generated in the Company's factories during both melting and
mill product processing. Scrap obtained through customer buyback arrangements
provides a "closed loop" arrangement resulting in greater supply and cost
stability. Externally purchased scrap comes from a wide range of sources,
including customers, collectors, processors and brokers. The Company anticipates
that 30% to 35% of the scrap it will utilize during 2006 will be purchased from
external suppliers, as compared to 35% to 40% for 2005, due to the Company's
successful efforts to increase its closed loop arrangements. The Company also
occasionally sells scrap, usually in a form or grade it cannot economically
recycle.
Market forces can significantly impact the supply or cost of externally
produced scrap. The amount of scrap generated in the supply chain varies during
the titanium business cycles. During the middle of the cycle, scrap generation
and consumption are in relative equilibrium, minimizing disruptions in supply or
significant changes in the available supply and market prices for scrap.
Increasing or decreasing cycles tend to cause significant changes in both the
supply and market price of scrap. Early in the titanium cycle, when the demand
for titanium melted and mill products begins to increase, the Company's
requirements (and those of other titanium manufacturers) precede the increase in
scrap generation by downstream customers and the supply chain, placing upward
pressure on the market price of scrap. The opposite situation occurs when demand
for titanium melted and mill products begins to decline, resulting in greater
availability of supply and placing downward pressure on the market price of
scrap. As a net purchaser of scrap, the Company is susceptible to price
increases during periods of increasing demand. This phenomenon normally results
in higher selling prices for melted and mill products, which tends to offset the
increased material costs.
All of the Company's major competitors utilize scrap as a raw material in
their melt operations. In addition to use by titanium manufacturers, titanium
scrap is used in steel-making operations during production of interstitial-free
steels, stainless steels and high-strength-low-alloy steels. Recent strong
demand for these steel products, especially from China, has produced a
significant increase in demand for titanium scrap at a time when titanium scrap
generation rates are at low levels, partly due to lower commercial aircraft
build rates over the past few years. These events created a significantly
tightened supply of titanium scrap during 2004 and 2005, and the Company expects
this trend to continue during 2006. For TIMET, this will translate to lower
availability and higher cost for externally purchased scrap in the near-term.
In 2005 the Company was somewhat limited in its ability to raise prices for
the portion of its business that is subject to long-term pricing agreements. The
Company's ability to offset these increased material costs with higher selling
prices should improve in 2006, as many of the Company's long-term agreements
("LTAs") have either expired or have been renegotiated for 2006 with price
adjustments that take into account raw material cost fluctuations. Additionally,
the expected increase in commercial aircraft build rates over the next several
years, as previously discussed, could have the effect of lessening the shortage
of titanium scrap. Further, several titanium producers, including TIMET, have
recently announced plans to expand their respective sponge producing
capabilities. Although these expansions should help reduce the current imbalance
of global supply and demand for raw materials, the Company does not believe the
raw material shortage will be fully relieved at any time in the near future and
therefore expects relatively high prices for raw materials to continue for at
least the near term.
Various alloys used in the production of titanium products are also
available from a number of suppliers. However, the recent high level of global
demand for steel products has also resulted in a significant increase in the
costs for several alloys, such as vanadium and molybdenum. The cost of these
alloys during 2005 was significantly higher than at any point during the past 10
years. Vanadium and Molybdenum costs peaked in the spring of 2005 and finished
the year well below those levels. Although availability is not expected to be a
concern and the Company has negotiated certain price and cost protection with
suppliers and customers, there is no assurance that such alloy costs will not
continue to fluctuate significantly in the near future.
Customer agreements. The Company has LTAs with certain major customers,
including, among others, The Boeing Company ("Boeing"), Rolls-Royce plc and its
German and U.S. affiliates ("Rolls-Royce"), United Technologies Corporation
("UTC," Pratt & Whitney and related companies), Societe Nationale d<180>Etude et
de Construction de Moteurs d'Aviation ("Snecma"), Wyman-Gordon Company
("Wyman-Gordon," a unit of Precision Castparts Corporation ("PCC")) and VALTIMET
SAS ("VALTIMET"). These agreements expire at various times from 2007 through
2012, are subject to certain conditions and generally provide for (i) minimum
market shares of the customers' titanium requirements or firm annual volume
commitments, (ii) formula-determined prices (although some contain elements
based on market pricing) and (iii) price adjustments for certain raw material
and energy cost fluctuations. Generally, the LTAs require the Company's service
and product performance to meet specified criteria and contain a number of other
terms and conditions customary in transactions of these types. Certain
provisions of these LTAs have been amended in the past and may be amended in the
future to meet changing business conditions. During 2005, 49% of the Company's
sales revenues were from customers under LTAs.
In certain events of nonperformance by the Company or the customer, the
LTAs may be terminated early. Although it is possible that some portion of the
business would continue on a non-LTA basis, the termination of one or more of
the LTAs could result in a material effect on the Company's business, results of
operations, financial position or liquidity. The LTAs were designed to limit
selling price volatility to the customer, while providing TIMET with a committed
base of volume throughout the aerospace business cycles.
During the third quarter of 2003, the Company and Wyman-Gordon agreed to
terminate the 1998 purchase and sale agreement associated with the formation of
the titanium castings joint venture previously owned by the two parties. The
Company paid Wyman-Gordon a total of $6.8 million in three quarterly
installments in connection with this termination, which included the termination
of certain favorable purchase terms. The Company recorded a one-time charge for
the entire $6.8 million as a reduction to sales in the third quarter of 2003.
Concurrently, the Company entered into new long-term purchase and sale
agreements with Wyman-Gordon that expire in 2008.
Prior to July 1, 2005, under the terms of the previous LTA between TIMET
and Boeing, in 2002 through 2007, Boeing would have been required to advance
TIMET $28.5 million annually less $3.80 per pound of titanium product purchased
by Boeing subcontractors under the Boeing LTA during the preceding year.
Effectively, the Company collected $3.80 less from Boeing than the LTA selling
price for each pound of titanium product sold directly to Boeing and reduced the
related customer advance recorded by the Company. For titanium products sold to
Boeing subcontractors, the Company collected the full LTA selling price, but
gave Boeing credit by reducing the next year's annual advance by $3.80 per
pound. The Boeing customer advance was also reduced as the Company recognized
income under the take-or-pay provisions of the LTA, as described in Note 10 to
the Consolidated Financial Statements. Under a separate agreement, TIMET must
establish and hold buffer inventory for Boeing at TIMET's facilities, for which
Boeing will be invoiced by TIMET at LTA pricing when such material is processed
into a mill product by TIMET.
Effective July 1, 2005, the Company entered into a new LTA with Boeing. The
new LTA expires on December 31, 2010 and provides for, among other things, (i)
mutual annual purchase and supply commitments by both parties, (ii) continuation
of the existing buffer inventory program currently in place for Boeing and (iii)
certain improved product pricing, including certain adjustments for raw material
cost fluctuations. Beginning in 2006, the new LTA also replaces the take-or-pay
provisions of the previous LTA with an annual makeup payment early in the
following year in the event Boeing purchases less than its annual volume
commitment in any year. See Item 7 - MD&A for additional information regarding
the Boeing LTA.
The Company's LTA with VALTIMET, a manufacturer of welded stainless steel
and titanium tubing that is principally sold into the industrial markets, was
entered into in 1997 and expires in 2007. VALTIMET is a 44%-owned affiliate of
TIMET. Under the VALTIMET LTA, TIMET has agreed to provide a certain percentage
of VALTIMET's titanium requirements at formula-determined selling prices,
subject to certain conditions. Certain provisions of this contract have been
amended in the past and may be amended in the future to meet changing business
conditions.
Markets and customer base. The following table summarizes the Company's
sales revenue by geographical location:
Year ended December 31,
-------------------------------------------------
2005 2004 2003
-------------- -------------- -------------
(Percentage of total sales revenue)
Sales revenue to customers within:
North America 56% 55% 55%
Europe 36% 40% 38%
Other 8% 5% 7%
-------------- -------------- -------------
100% 100% 100%
============== ============== =============
Further information regarding the Company's external sales, net income,
long-lived assets and total assets can be found in the Company's Consolidated
Balance Sheets, Consolidated Statements of Operations and Notes 6 and 21 to the
Consolidated Financial Statements.
Substantially all of the Company's sales and operating income are derived
from operations based in the U.S., the U.K., France and Italy. As shown in the
below table, the Company generates more than half of its sales revenue from
sales to the commercial aerospace sector. As previously noted, the Company has
LTAs with certain major aerospace customers, including Boeing, Rolls-Royce, UTC,
Snecma and Wyman-Gordon. This concentration of customers may impact the
Company's overall exposure to credit and other risks, either positively or
negatively, in that all of these customers may be similarly affected by the same
economic or other conditions. The following table provides supplemental sales
revenue information regarding the Company's dependence on the commercial
aerospace sector and certain customer relationships:
Year ended December 31,
--------------------------------------------------
2005 2004 2003
--------------- -------------- -------------
(Percentage of total sales revenue)
Sales revenue to:
Commercial aerospace sector 57% 57% 57%
=============== ============= ==============
Customers under LTAs 49% 44% 41%
=============== ============= ==============
Significant customers under LTAs: (1)
Rolls-Royce and other Rolls-Royce suppliers (2) 12% 15% 15%
=============== ============= ==============
Ten largest customers 45% 48% 44%
=============== ============= ==============
Significant customers: (1)
PCC and related entities 13% 13% 13%
=============== ============= ==============
--------------------------------------------------------------------------------------------------------------------
(1) Greater than 10% of net sales.
(2) Includes direct sales to certain of the PCC-related entities under the
terms of the Rolls-Royce LTAs.
The primary market for titanium products in the commercial aerospace sector
consists of two major manufacturers of large (over 100 seats) commercial
airframes - Boeing Commercial Airplanes Group (a unit of Boeing) and Airbus (80%
owned by European Aeronautic Defence and Space Company and 20% owned by BAE
Systems). In addition to the airframe manufacturers, the following four
manufacturers of large civil aircraft engines are also significant titanium
users - Rolls-Royce, General Electric Aircraft Engines, Pratt & Whitney and
Snecma. The Company's sales are made both directly to these major manufacturers
and to companies (including forgers such as Wyman-Gordon) that use the Company's
titanium to produce parts and other materials for such manufacturers. If any of
the major aerospace manufacturers were to significantly reduce aircraft and/or
jet engine build rates from those currently expected, there could be a material
adverse effect, both directly and indirectly, on the Company's business, results
of operations, financial position and liquidity.
The backlogs for Boeing and Airbus reflect orders for aircraft to be
delivered over several years. Changes in the economic environment and the
financial condition of airlines can result in rescheduling or cancellation of
contractual orders. Accordingly, aircraft manufacturer backlogs are not
necessarily a reliable indicator of near-term business activity, but may be
indicative of potential business levels over a longer-term horizon. The
following table shows the estimated firm order backlogs for Boeing and Airbus,
as reported by The Airline Monitor in January 2006:
At December 31,
-------------------------------------------------
2005 2004 2003
-------------- ------------- --------------
Firm order backlog - all planes:
Airbus 2,177 1,500 1,454
Boeing 1,783 1,089 1,101
-------------- ------------- --------------
3,960 2,589 2,555
============== ============= ==============
Firm order backlog - wide body planes:
Airbus 500 466 471
Boeing 671 287 230
-------------- ------------- --------------
1,171 753 701
============== ============= ==============
Wide body planes as % of total firm order backlog 30% 29% 27%
============== ============= ==============
Wide body planes (e.g., Boeing 747, 777 and 787 and Airbus A330, A340, and
A380) tend to use a higher percentage of titanium in their airframes, engines
and parts than narrow body planes (e.g., Boeing 737 and 757 and Airbus A318,
A319 and A320). Newer models of planes tend to use a higher percentage of
titanium than older models. Additionally, Boeing generally uses a higher
percentage of titanium in its airframes than Airbus. For example, the Company
estimates that approximately 59 metric tons, 45 metric tons and 18 metric tons
of titanium are purchased for the manufacture of each Boeing 777, 747 and 737,
respectively, including both the airframes and engines. The Company estimates
that approximately 25 metric tons, 18 metric tons and 12 metric tons of titanium
are purchased for the manufacture of each Airbus A340, A330 and A320,
respectively, including both the airframes and engines.
At year-end 2005, a total of 159 firm orders had been placed for the Airbus
A380, a program officially launched in 2000 with anticipated first deliveries in
2006. Current estimates are that approximately 76 metric tons of titanium (50
metric tons for the airframe and 26 metric tons for the engines) will be
purchased for each A380 manufactured. Additionally, at year-end 2005, a total of
291 firm orders have been placed for the Boeing 787, a program officially
launched in April 2004 with anticipated first deliveries in 2008. Although the
787 will contain more composite materials than a typical Boeing airplane, the
Company estimates that approximately 91 metric tons of titanium (80 metric tons
for the airframe and 11 metric tons for the engines) will be purchased for each
787 manufactured. The Company believes significant additional titanium will be
required in the early years of 787 manufacturing until the program reaches
maturity.
During 2005, Airbus officially launched the A350 program, which is a major
derivative of the Airbus A330 with first deliveries scheduled for 2010. As of
December 31, 2005, firm booked orders received by Airbus for the A350 totaled 87
airplanes. These A350s will use composite materials and new engines similar to
the ones used on the Boeing 787 and are expected to require significantly more
titanium as compared with earlier Airbus models. The Company's preliminary
estimates are that approximately 51 metric tons (40 metric tons for the airframe
and 11 metric tons for the engines) will be purchased for each A350
manufactured. However, the final titanium buy weight may change as the A350 is
still in the design phase.
Outside of commercial aerospace and military sectors, the Company
manufactures a wide range of products for customers in the chemical process, oil
and gas, consumer, sporting goods, automotive and power generation.
Approximately 15% of the Company's sales revenue in 2005 and 2004 and 16% in
2003 was generated by sales into industrial and emerging markets, including
sales to VALTIMET for the production of welded tubing. For the oil and gas
industry, the Company provides seamless pipe for downhole casing, risers,
tapered stress joints and other offshore oil and gas production equipment, along
with firewater piping systems.
In addition to melted and mill products, which are sold into the commercial
aerospace, military, industrial and emerging markets sectors, the Company sells
certain other products such as titanium fabrications, titanium scrap and
titanium tetrachloride. Sales of these other products represented 15% of the
Company's sales revenue in 2005 and 13% in each of 2004 and 2003.
The Company's backlog of unfilled orders was approximately $870 million at
December 31, 2005, compared to $450 million at December 31, 2004 and $205
million at December 31, 2003. Over 90% of the 2005 year-end backlog is scheduled
for shipment during 2006. The Company's order backlog may not be a reliable
indicator of future business activity.
The Company has explored and will continue to explore strategic
arrangements in the areas of product development, production and distribution.
The Company will also continue to work with existing and potential customers to
identify and develop new or improved applications for titanium that take
advantage of its unique qualities.
Competition. The titanium metals industry is highly competitive on a
worldwide basis. Producers of melted and mill products are located primarily in
the United States, Japan, France, Germany, Italy, Russia, China and the United
Kingdom. In addition, producers of other metal products, such as steel and
aluminum, maintain forging, rolling and finishing facilities that could be used
or modified without substantial capital expenditures to process titanium
products.
There are currently six major, and several minor, producers of titanium
sponge in the world. Four of the major producers have announced plans to
increase sponge production capacity. TIMET is currently the only major U.S.
sponge producer. The Company believes that entry as a new producer of titanium
sponge would require a significant capital investment and substantial technical
expertise.
The Company's principal competitors in the aerospace titanium market are
Allegheny Technologies Incorporated ("ATI") and RTI International Metals, Inc.
("RTI"), both based in the United States, and Verkhnaya Salda Metallurgical
Production Organization ("VSMPO"), based in Russia. UNITI (a joint venture
between ATI and VSMPO), RTI and certain Japanese producers are the Company's
principal competitors in the industrial and emerging markets. The Company
competes primarily on the basis of price, quality of products, technical support
and the availability of products to meet customers' delivery schedules.
In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant. This was primarily attributable
to relative currency exchange rates and, with respect to Japan, Russia,
Kazakhstan and Ukraine, import duties (including antidumping duties). However,
since 1993, imports of titanium sponge, ingot and mill products, principally
from Russia and Kazakhstan, have increased and have had a significant
competitive impact on the U.S. titanium industry. To the extent the Company is
able to take advantage of this situation by purchasing sponge from such
countries for use in its own operations, the negative effect of these imports on
the Company can be somewhat mitigated.
Generally, imports of titanium products into the U.S. are subject to a 15%
"normal trade relations" tariff. For tariff purposes, titanium products are
broadly classified as either wrought (billet, bar, sheet, strip, plate and
tubing) or unwrought (sponge, ingot and slab). Because a significant portion of
end-use products made from titanium products are ultimately exported, the
Company, along with its principal competitors and many customers, actively
utilize the duty-drawback mechanism to recover most of the tariff paid on
imports.
From time-to-time, the U.S. government has granted preferential trade
status to certain titanium products imported from particular countries (notably
wrought titanium products from Russia, which carried no U.S. import duties from
approximately 1993 until 2004). It is possible that such preferential status
could be granted again in the future.
The Japanese government has raised the elimination or harmonization of
tariffs on titanium products, including titanium sponge, for consideration in
multi-lateral trade negotiations through the World Trade Organization (the
so-called "Doha Round"). As part of the Doha Round, the United States has
proposed the staged elimination of all industrial tariffs, including those on
titanium. The Japanese government has specifically asked that titanium in all it
forms be included in the tariff elimination program. The Company has urged that
no change be made to these tariffs, either on wrought or unwrought products. The
negotiations are currently scheduled to conclude at the end of 2006 for
implementation beginning in 2007.
TIMET has successfully resisted, and will continue to resist, efforts to
eliminate duties on sponge and unwrought titanium products, although no
assurances can be made that the Company will continue to be successful in these
activities. Further reductions in, or the complete elimination of, any or all of
these tariffs could lead to increased imports of foreign sponge, ingot and mill
products into the U.S. and an increase in the amount of such products on the
market generally, which could adversely affect pricing for titanium sponge,
ingot and mill products and thus the Company's business, results of operations,
financial position or liquidity.
Research and development. The Company's research and development activities
are directed toward expanding the use of titanium and titanium alloys in all
market sectors. Key research activities include the development of new alloys,
development of technology required to enhance the performance of TIMET's
products in the traditional industrial and aerospace markets and applications
development for automotive and other emerging markets. The Company conducts the
majority of its research and development activities at its Henderson Technical
Laboratory in Henderson, Nevada, with additional activities at its Witton,
England facility. The Company incurred research and development costs of $3.2
million in 2005, $2.9 million in 2004 and $2.8 million in 2003.
In April 2003, the Company was selected by the United States Defense
Advanced Research Projects Agency ("DARPA") to explore low cost titanium
extraction processes. Since 2003, the main effort has focused on the FFC
Cambridge process. As of December 31, 2005, work to develop and scale up that
process at TIMET has been discontinued due to low overall process efficiency.
TIMET continues to work in partnership with DARPA and others to meet the goals
of the DARPA titanium initiative. The work with DARPA complements TIMET's own
programs exploring new technologies and improvements to the existing Vacuum
Distilled sponge process.
Patents and trademarks. The Company holds U.S. and non-U.S. patents
applicable to certain of its titanium alloys and manufacturing technology, which
expire at various times from 2007 through 2025. The Company continually seeks
patent protection with respect to its technical base and has occasionally
entered into cross-licensing arrangements with third parties. The Company
believes the trademarks TIMET(R) and TIMETAL(R), which are protected by
registration in the U.S. and other countries, are important to its business. The
Company believes that proprietary alloys targeting automotive exhaust,
turbocharger, engine valve, and suspension spring applications provide the
company competitive advantages in the automotive market. Further, the Company
was recently granted patent protection for an improved machinability alloy,
TIMETAL 54M, for use in forged and machined components applicable to both
aerospace and non-aerospace market sectors. Additionally, the Company has been
granted certain patents and has certain other patent applications pending
relating to various aspects of its manufacturing technology. However, the
majority of the Company's titanium alloys and manufacturing technologies do not
benefit from patent or other intellectual property protection.
Employees. The cyclical nature of the aerospace industry and its impact on
the Company's business is the principal reason for significant changes in the
Company's employment. The increases during 2004 and 2005 reflect the increase in
demand for titanium products during those periods. The Company currently expects
employment to increase throughout 2006 as production continues to increase and
its sponge plant expansion project in Henderson, Nevada nears completion. The
following table shows the number of employees at the end of the past 3 years:
Employees at December 31,
-------------------------------------------------------
2005 2004 2003
---------------- ---------------- ---------------
U.S. 1,476 1,376 1,266
Europe 893 851 789
---------------- ---------------- ---------------
2,369 2,227 2,055
================ ================ ===============
The Company's production, maintenance, clerical and technical workers in
Toronto, Ohio, and its production and maintenance workers in Henderson, Nevada
(approximately 50% of the Company's total U.S. employees) are represented by the
United Steelworkers of America under contracts expiring in July 2008 and January
2008, respectively. Employees at the Company's other U.S. facilities are not
covered by collective bargaining agreements. Approximately 64% of the salaried
and hourly employees at the Company's European facilities are represented by
various European labor unions. The Company recently extended its labor agreement
with its U.K. production and maintenance employees through 2008, and the
Company's labor agreements with its French and Italian employees are renewed
annually.
The Company currently considers its employee relations to be satisfactory.
However, it is possible that there could be future work stoppages or other labor
disruptions that could materially and adversely affect the Company's business,
results of operations, financial position or liquidity.
Regulatory and environmental matters. The Company's operations are governed
by various Federal, state, local and foreign environmental and worker safety
laws and regulations. In the U.S., such laws include the Occupational, Safety
and Health Act, the Clean Air Act, the Clean Water Act and the Resource
Conservation and Recovery Act. The Company uses and manufactures substantial
quantities of substances that are considered hazardous, extremely hazardous or
toxic under environmental and worker safety and health laws and regulations. The
Company has used and manufactured such substances throughout the history of its
operations. Although the Company has substantial controls and procedures
designed to reduce continuing risk of environmental, health and safety issues,
the Company could incur substantial cleanup costs, fines and civil or criminal
sanctions, third party property damage or personal injury claims as a result of
violations or liabilities under these laws or non-compliance with environmental
permits required at our facilities. In addition, government environmental
requirements or the enforcement thereof may become more stringent in the future.
There can be no assurance that some, or all, of the risks discussed under this
heading will not result in liabilities that would be material to the Company's
business, results of operations, financial position or liquidity.
The Company believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker health and
safety laws. The Company's policy is to continually strive to improve
environmental, health and safety performance. The Company incurred capital
expenditures related to health, safety and environmental compliance and
improvement of approximately $25.1 million in 2005, $5.1 million in 2004 and
$1.9 million in 2003. Such capital expenditures include $24.2 million in 2005
and $3.9 million in 2004 related to the construction of a water conservation
facility at the Company's Henderson, Nevada location. The Company's capital
budget provides for approximately $4.6 million for environmental, health and
safety capital expenditures during 2006.
From time to time, the Company may be subject to health, safety or
environmental regulatory enforcement under various statutes, resolution of which
typically involves the establishment of compliance programs. Occasionally,
resolution of these matters may result in the payment of penalties. However, the
imposition of more strict standards or requirements under environmental, health
or safety laws and regulations could result in expenditures in excess of amounts
currently estimated to be required for such matters. See Note 19 to the
Consolidated Financial Statements.
Related parties. At December 31, 2005, Valhi, Inc. ("Valhi") and other
entities or persons related to Harold C. Simmons held approximately 52.6% of
TIMET's outstanding common stock and 54.1% of the Company's Series A Preferred
Stock. See Notes 1 and 18 to the Consolidated Financial Statements.
Available information. The Company maintains an Internet website at
www.timet.com. The Company's Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, and any amendments thereto, are or
will be available free of charge at such website as soon as reasonably
practicable after they are filed or furnished, as applicable, with the SEC.
Additionally, the Company's (i) Corporate Governance Guidelines, (ii) Code of
Business Conduct and Ethics and (iii) Audit Committee and Management Development
and Compensation Committee charters are also available on the Company's website.
Such documents will also be provided to shareholders upon request. Such requests
should be directed to the attention of TIMET's Investor Relations Department at
TIMET's corporate offices located at 5430 LBJ Freeway, Suite 1700, Dallas Texas
75240.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549, and may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC.
ITEM 1A: RISK FACTORS
Listed below are certain risk factors associated with our business. In
addition to the potential effect of these risk factors discussed below, any risk
factor that could result in reduced earnings, liquidity or operating losses,
could in turn adversely affect our ability to meet our liabilities or adversely
affect the quoted market prices for our securities.
The cyclical nature of the industries in which our customers operate causes
such customers' demand for our products to be cyclical, creating uncertainty
regarding our future profitability. The titanium industry in general, and TIMET
specifically, has historically derived a substantial portion of its business
from the commercial aerospace sector. Consequently, the cyclical nature of the
commercial aerospace sector has been the principal driver of the historical
fluctuations in our performance. Over the past 25 years, the titanium industry
had cyclical peaks in mill product shipments in 1989, 1997 and 2001 and cyclical
lows in 1983, 1991, 1999 and 2002. Prior to 2004, demand for titanium reached
its highest level in 1997, when industry mill product shipments reached
approximately 60,700 metric tons. However, since that peak, industry mill
product shipments have fluctuated significantly, primarily due to a continued
change in demand for titanium from the commercial aerospace sector, but also due
to geopolitical instability and the economic impact of terrorist threats and
attacks. Sales of our products to the commercial aerospace sector accounted for
57% of our total sales revenue in each of the last three years. Events that
could adversely affect the commercial aerospace sector, such as future terrorist
attacks, world health crises or reduced orders from commercial airlines
resulting from continued operating losses at the airlines, could significantly
decrease our results of operations, and our business and financial condition
could significantly decline.
Adverse changes to, or interruptions in, our relationships with our major
commercial aerospace customers could reduce our revenues. In 2005, approximately
57% of our revenues were derived from sales to the commercial aerospace sector.
Sales under LTAs with certain customers in the commercial aerospace sector
account for a significant percentage of our annual sales revenue. If we are
unable to maintain our relationships with our major commercial aerospace
customers, including Boeing, Rolls-Royce, Snecma, UTC and Wyman-Gordon, under
the LTAs we have with these customers, our sales could decrease substantially.
Our failure to develop new markets would result in our continued dependence
on the cyclical commercial aerospace sector, and our operating results would,
accordingly, remain cyclical. In an effort to reduce dependence on the
commercial aerospace market and to increase participation in other markets, we
have been devoting resources to developing new markets and applications for our
products, principally in automotive, oil and gas and other emerging markets for
titanium. Developing these emerging market applications involves substantial
risk and uncertainties due to the fact that titanium must compete with less
expensive alternative materials in these potential markets or applications. We
may not be successful in developing new markets or applications for our
products, significant time may be required for such development and uncertainty
exists as to the extent to which we will face competition in this regard.
Our dependence upon certain critical raw materials that are subject to
price and availability fluctuations could lead to increased costs or delays in
the manufacture and sale of our products. We rely on a limited number of
suppliers around the world, and principally on those located in Australia, for
our supply of titanium-containing rutile ore, one of the primary raw materials
used in the production of titanium sponge. While chlorine, another of the
primary raw materials used in the production of titanium sponge, is generally
widely available, we currently obtain our chlorine from a single supplier near
our sponge plant in Henderson, Nevada. Also, we cannot supply all our needs for
all grades of titanium sponge and scrap internally and are therefore dependent
on third parties for a substantial portion of our raw material requirements. All
of our major competitors utilize sponge and scrap as raw materials in their melt
operations. In addition to use by titanium manufacturers, titanium scrap is used
in certain steel-making operations. Current demand for these steel products,
especially from China, have produced a significant increase in demand for
titanium scrap at a time when titanium scrap generation rates are at low levels
because of the lower commercial aircraft build rates in recent years. Purchase
prices and availability of these critical materials are subject to volatility.
At any given time, we may be unable to obtain an adequate supply of these
critical materials on a timely basis, on price and other terms acceptable to us,
or at all.
We have experienced operating and net losses in the past and may not be
profitable in the future. We have incurred operating losses during each of 2003,
2002, 2000 and 1999 and incurred net losses in each year from 1999 through 2003.
Our ability to achieve profitability in the future is dependent upon a number of
factors, including the following:
o market demand and prices for titanium products, particularly demand
and pricing in the commercial aerospace sector;
o our ability to increase prices for titanium products to a level that
exceeds any increases in materials or production costs;
o the avoidance of any material adverse developments either in the
capacity utilization for the production of titanium sponge or the
availability of titanium scrap; and
o favorable general economic conditions throughout the world.
Reductions in, or the complete elimination of, any or all tariffs on
imported titanium products into the United States could lead to increased
imports of foreign sponge, ingot and mill products into the U.S. and an increase
in the amount of such products on the market generally, which could decrease
pricing for our products. In the U.S. titanium market, the increasing presence
of non-U.S. participants has become a significant competitive factor. Until
1993, imports of foreign titanium products into the U.S. had not been
significant. This was primarily attributable to relative currency exchange rates
and, with respect to Japan, Russia, Kazakhstan and Ukraine, import duties
(including antidumping duties). However, since 1993, imports of titanium sponge,
ingot and mill products, principally from Russia and Kazakhstan, have increased
and have had a significant competitive impact on the U.S. titanium industry.
Generally, imports of titanium products into the U.S. are subject to a 15%
"normal trade relations" tariff. For tariff purposes, titanium products are
broadly classified as either wrought (billet, bar, sheet, strip, plate and
tubing) or unwrought (sponge, ingot and slab). From time-to-time, the U.S.
government has granted preferential trade status to certain titanium products
imported from particular countries (notably wrought titanium products from
Russia, which carried no U.S. import duties from approximately 1993 until 2004).
It is possible that such preferential status could be granted again in the
future, and we may not be successful in resisting efforts to eliminate duties or
tariffs on titanium products. See discussion of Doha Round in "Business -
Competition."
We may be unable to reach or maintain satisfactory collective bargaining
agreements with unions representing a significant portion of our employees. Our
production, maintenance, clerical and technical workers in Toronto, Ohio, and
our production and maintenance workers in Henderson, Nevada, are represented by
the United Steelworkers of America under contracts expiring in July 2008 and
January 2008, for the respective locations. Approximately 64% of the salaried
and hourly employees at our European facilities are represented by various
European labor unions. Our labor agreement with our U.K. employees expires in
2008, and the agreements with our French and Italian employees are renewed
annually. A labor dispute or work stoppage could materially decrease our
operating results. We may not succeed in concluding collective bargaining
agreements with the unions to replace expiring agreements or to maintain
satisfactory relations under existing collective bargaining agreements. If our
employees were to engage in a strike, work stoppage or other slowdown, we could
experience a significant disruption of our operations or higher ongoing labor
costs.
Because we are subject to environmental and worker safety laws and
regulations, we may be required to remediate the environmental effects of our
operations or take steps to modify our operations to comply with these laws and
regulations, which could reduce our profitability. Various federal, state, local
and foreign environmental and worker safety laws and regulations govern our
operations. Throughout the history of our operations, we have used and
manufactured, and currently use and manufacture, substantial quantities of
substances that are considered hazardous, extremely hazardous or toxic under
environmental and worker safety and health laws and regulations. Although we
have substantial controls and procedures designed to reduce continuing risk of
environmental, health and safety issues, we could incur substantial cleanup
costs, fines and civil or criminal sanctions, third party property damage or
personal injury claims as a result of violations or liabilities under these laws
or non-compliance with environmental permits required at our facilities. In
addition, government environmental requirements or the enforcement thereof may
become more stringent in the future. Some or all of these risks may result in
liabilities that could reduce our profitability.
The titanium metals industry is highly competitive, and we may not be able
to compete successfully. The global markets in which we operate are highly
competitive. Competition is based on a number of factors, such as price, product
quality and service. Some of our competitors may be able to drive down prices
for our products because their costs are lower than our costs. In addition, some
of our competitors' financial, technological and other resources may be greater
than our resources, and such competitors may be better able to withstand changes
in market conditions. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements.
Further, consolidation of our competitors or customers in any of the industries
in which we compete may result in reduced demand for our products. In addition,
producers of metal products, such as steel and aluminum, maintain forging,
rolling and finishing facilities. Such facilities could be used or modified
without substantial expenditures to process titanium mill products, which could
lead to increased competition and decreased pricing for our titanium products.
In addition, many factors, including the historical presence of excess capacity
in the titanium industry, work to intensify the price competition for available
business at low points in the business cycle.
ITEM 1B: UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2: PROPERTIES
Set forth below is a listing of the Company's major production facilities.
In addition to its U.S. sponge capacity discussed below, the Company's worldwide
melting capacity presently aggregates approximately 44,650 metric tons
(estimated 22% of world capacity), and its mill product capacity aggregates
approximately 22,600 metric tons (estimated 18% of world capacity). Of the
Company's worldwide melting capacity, 35% is represented by electron beam cold
hearth melting ("EB") furnaces, 63% by vacuum arc remelting ("VAR") furnaces and
2% by a vacuum induction melting ("VIM") furnace.
Annual Practical
Capacities (3)
--------------------------------
Melted Mill
Manufacturing Location Products Manufactured Products Products
------------------------------------------ ------------------------------------ -------------- -------------
(metric tons)
Henderson, Nevada (1) Sponge, Ingot 12,250 -
Morgantown, Pennsylvania (1) Slab, Ingot, Raw materials
Processing 20,000 -
Toronto, Ohio (1) Billet, Bar, Plate, Sheet, Strip - 11,000
Vallejo, California (2) Ingot (including non-titanium
superalloys) 1,600 -
Ugine, France (2) (4) Ingot, Billet 2,100 1,500
Waunarlwydd (Swansea), Wales(1) Bar, Plate, Sheet - 3,100
Witton, England (2) Ingot, Billet, Bar 8,700 7,000
(1) Owned facility.
(2) Leased facility.
(3) Practical capacities are variable based on product mix and are not
additive.
(4) Practical capacities are based on the approximate maximum equivalent
product that CEZUS is contractually obligated to provide.
The Company has operated its major production facilities at varying levels
of practical capacity during the past three years. Overall in 2005, the plants
operated at approximately 80% of practical capacity, as compared to 73% in 2004
and 56% in 2003. In 2006, the Company's plants are expected to operate at
approximately 88% of practical capacity. However, practical capacity and
utilization measures can vary significantly based upon the mix of products
produced.
United States production. The Company's VDP sponge facility is expected to
operate at its full annual practical capacity of 8,600 metric tons during 2006,
which is comparable to 2005. VDP sponge is used principally as a raw material
for the Company's melting facilities in the U.S. and Europe. In May 2005, the
Company announced its plans to expand its VDP sponge facility in Henderson,
Nevada. The Company currently expects to complete this expansion by the first
quarter of 2007, which will provide the capacity to produce an additional 4,000
metric tons of sponge annually, an increase of approximately 47% over current
Henderson sponge production capacity levels. The Company currently estimates the
capital cost for the project will approximate $38 million. The raw materials
processing facility in Morgantown, Pennsylvania primarily processes scrap used
as melting feedstock, either in combination with sponge or separately.
The Company's U.S. melting facilities in Henderson, Nevada, Morgantown,
Pennsylvania and Vallejo, California produce ingot and slab, which are either
used as feedstock for the Company's mill products operations or sold to third
parties. These melting facilities are expected to operate at approximately 82%,
92% and 55%, respectively, of annual practical capacity in 2006, as compared to
70%, 91% and 59%, respectively, in 2005.
Titanium mill products are produced by TIMET in the U.S. at its forging and
rolling facility in Toronto, Ohio, which receives ingot or slab principally from
the Company's U.S. melting facilities. The Company's U.S. forging and rolling
facility is expected to operate at approximately 82% of annual practical
capacity in 2006, up from 68% in 2005. Capacity utilization across the Company's
individual mill product lines varies.
European production. The Company conducts its operations in Europe
primarily through its wholly owned subsidiaries TIMET UK, Ltd. ("TIMET UK") and
Loterios S.p.A. ("Loterios") and its 70% owned subsidiary TIMET Savoie. TIMET
UK's Witton, England laboratory and manufacturing facilities are leased pursuant
to long-term operating leases expiring in 2014 and 2024, respectively. TIMET
Savoie has the right to utilize portions of the Ugine, France plant of Compagnie
Europeenne du Zirconium-CEZUS, S.A. ("CEZUS"), the 30% minority partner in TIMET
Savoie, pursuant to an agreement scheduled to expire in 2006. TIMET is currently
finalizing negotiations with CEZUS to extend its agreement through 2011 and
expand its available capacity in 2006 and beyond.
TIMET UK's melting facility in Witton, England produces VAR ingot used
primarily as feedstock for its Witton forging operations. The forging operations
process the ingot into billet product for sale to third parties or into an
intermediate product for further processing into bar or plate at its facility in
Waunarlwydd, Wales. TIMET UK's melting and mill products production in 2006 is
expected to operate at approximately 91% and 85%, respectively, of annual
practical capacity, compared to 73% and 69%, respectively, in 2005.
The capacity of TIMET Savoie in Ugine, France is to a certain extent
dependent upon the level of activity in CEZUS' zirconium business, which may
from time to time provide TIMET Savoie with capacity in excess of that which
CEZUS is contractually required to provide. During 2005, TIMET Savoie utilized
119% of the maximum annual capacity CEZUS was contractually required to provide
in 2005, and the Company expects to utilize approximately 102% of the maximum
annual capacity CEZUS will be expected to provide in 2006 based on the agreement
currently being finalized.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. See Note 19 to
the Consolidated Financial Statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of TIMET security holders during the
quarter ended December 31, 2005. However, in February 2006, the Company's Board
of Directors and the Company's stockholders holding more than a majority of the
outstanding shares of common stock approved an amendment to the Company's
Amended and Restated Certificate of Incorporation to increase the number of
authorized shares of the Company's capital stock from 100,000,000 shares
(90,000,000 shares of common stock, $.01 par value, and 10,000,000 shares of
preferred stock, $.01 par value) to 210,000,000 shares (200,000,000 shares of
common stock, $.01 par value, and 10,000,000 shares of preferred stock, $.01 par
value).
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
TIMET's common stock is traded on the New York Stock Exchange (symbol:
"TIE"). The high and low sales prices for the Company's common stock during 2005
and 2004 are set forth below. All prices (as well as all share numbers
referenced herein) have been adjusted to reflect (i) the two-for-one stock split
which became effective after the close of trading on February 16, 2006, (ii) the
two-for-one stock split which became effective after the close of trading on
September 6, 2005 and (iii) the five-for-one stock split which became effective
after the close of trading on August 27, 2004.
Year ended December 31, 2005: High Low
----------------- -----------------
First quarter $ 10.13 $ 5.83
Second quarter $ 14.38 $ 7.76
Third quarter $ 21.20 $ 12.32
Fourth quarter $ 39.72 $ 17.13
Year ended December 31, 2004:
First quarter $ 5.18 $ 2.12
Second quarter $ 5.40 $ 3.59
Third quarter $ 6.23 $ 4.60
Fourth quarter $ 6.65 $ 4.63
On March 10, 2006, the closing price of TIMET common stock was $41.74 per
share. As of March 10, 2006, there were 204 shareholders of record of TIMET
common stock, which the Company estimates represent approximately 31,365 actual
shareholders.
In October 2002, the Company exercised its right to defer future interest
payments on TIMET's 6.625% Convertible Junior Subordinated Debentures due 2026
("Subordinated Debentures") held by the TIMET Capital Trust I (the "Capital
Trust"), effective for the December 1, 2002 scheduled interest payment. Interest
continued to accrue at the 6.625% coupon rate on the principal and unpaid
interest until the Company's Board of Directors approved resumption of scheduled
quarterly interest payments on the Subordinated Debentures beginning with the
payment on June 1, 2004. The Company's Board also approved payment of all
previously deferred interest on the Subordinated Debentures. On April 15, 2004,
the Company paid the deferred interest in the amount of $21.7 million, $21.0
million of which related to the 6.625% mandatorily redeemable convertible
preferred securities, beneficial unsecured convertible securities ("BUCS")
issued by the Capital Trust.
In August 2004, the Company completed an exchange offer pursuant to which
the Company had offered to exchange all of the 4,024,820 outstanding BUCS issued
by the Capital Trust for shares of the Company's 6.75% Series A Convertible
Preferred Stock (the "Series A Preferred Stock") at the exchange rate of one
share of Series A Preferred Stock for each BUCS. Based upon the 3,909,103 BUCS
tendered and accepted for exchange as of the close of the offer on August 31,
2004, the Company issued 3,909,103 shares of Series A Preferred Stock in
exchange for such BUCS. Holders of the Series A Preferred Stock are entitled to
receive cumulative cash dividends at the rate of 6.75% of the $50 per share
liquidation preference per annum per share (equivalent to $3.375 per annum per
share), when, as and if declared by the Company's board of directors. During the
third quarter of 2004, the Company recognized a $15.5 million non-cash,
non-operating gain related to the BUCS exchange. During the third and fourth
quarters of 2005, an aggregate of 926,490 shares of Series A Preferred Stock
were converted into 6,176,600 shares of TIMET common stock. As of December 31,
2005, there were 2,982,613 shares of the Series A Preferred Stock outstanding.
Subsequent to December 31, 2005 and through March 10, 2006, an additional
346,016 shares of Series A Preferred Stock were converted into 2,306,765 shares
of TIMET common stock. See Notes 12 and 14 to the Consolidated Financial
Statements.
The Company's new U.S. credit agreement contains certain financial
covenants that may restrict the Company's ability to make dividend payments on
both the Company's common stock and Series A Preferred Stock or make
distributions on the BUCS. Such covenants do not currently restrict the
Company's ability to pay dividends or make distributions. See Item 7 - MD&A and
Note 11 to the Consolidated Financial Statements.
On August 12, 2005, the Company retired all 180,000 shares of its treasury
stock. The retirement of such treasury stock, which had a cost basis of $1.2
million, resulted in a $1,800 reduction of common stock, a $990,000 reduction of
additional paid-in capital and a $216,000 decrease in accumulated earnings.
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Company's Consolidated Financial Statements and Item 7 - MD&A.
Year ended December 31,
-------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ------------ ------------
(restated) (restated) (restated) (restated)
($ in millions, except per share and product data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 749.8 $ 501.8 $ 385.3 $ 366.5 $ 486.9
Gross margin (1) $ 199.4 $ 63.7 $ 5.6 $ 6.2 $ 34.9
Operating income (loss) (1)(2) $ 171.1 $ 43.0 $ (6.0) $ (11.5) $ 59.5
Interest expense $ 4.0 $ 12.5 $ 16.4 $ 17.1 $ 18.3
Net income (loss) attributable to
common stockholders (1)(2) $ 143.7 $ 43.3 $ (24.4) $ (102.2) $ (46.7)
Earnings (loss) per share:
Basic (1)(2)(3) $ 2.20 $ 0.68 $ (0.39) $ (1.62) $ (0.74)
Diluted (1)(2)(3) $ 1.72 $ 0.66 $ (0.39) $ (1.62) $ (0.74)
BALANCE SHEET DATA:
Cash and cash equivalents (4) $ 17.8 $ 7.9 $ 37.3 $ 6.4 $ 24.5
Total assets (2) $ 907.3 $ 700.6 $ 594.8 $ 605.0 $ 726.7
Bank indebtedness (5) $ 51.4 $ 43.2 $ - $ 19.4 $ 12.4
Capital lease obligations $ 0.2 $ 0.2 $ 10.3 $ 10.2 $ 8.9
Debt payable to Capital Trust $ 5.9 $ 12.0 $ 207.5 $ 207.5 $ 207.5
Stockholders' equity $ 562.2 $ 406.4 $ 177.7 $ 189.7 $ 319.2
OTHER OPERATING DATA:
Cash flows provided (used) by:
Operating activities $ 72.9 $ (22.4) $ 65.8 $ (13.6) $ 62.6
Investing activities (61.5) (44.5) (14.5) (7.5) (16.1)
Financing activities - 38.7 (22.1) 3.6 (31.4)
----------- ----------- ----------- ------------ ------------
Net cash provided (used) $ 11.4 $ (28.2) $ 29.2 $ (17.5) $ 15.1
Melted product shipments (6) 5,655 5,360 4,725 2,400 4,415
Average melted product prices (6) $ 19.85 $ 13.45 $ 12.15 $ 14.50 $ 14.50
Mill product shipments (6) 12,660 11,365 8,875 8,860 12,180
Average mill product prices (6) $ 41.75 $ 32.05 $ 31.50 $ 31.40 $ 29.80
Active employees at December 31 2,369 2,227 2,055 1,956 2,410
Order backlog at December 31(7) $ 870.0 $ 450.0 $ 205.0 $ 185.0 $ 240.0
Capital expenditures $ 61.1 $ 23.6 $ 12.5 $ 7.8 $ 16.1
(1) Effective January 1, 2005, the Company changed its method for inventory
determination from the LIFO cost method to the specific identification cost
method for the approximate 40% of the Company's consolidated inventories
previously accounted for under the LIFO cost method. In accordance with
accounting principles generally accepted in the United States of America
("GAAP"), net income (loss) attributable to common stockholders, and the
related per share amounts, for the years ended December 31, 2004, 2003,
2002 and 2001, and total assets and stockholders' equity as of December 31,
2004, 2003, 2002 and 2001, have been retroactively restated for this change
in accounting principle. See Note 2 to the Consolidated Financial
Statements. Net income (loss) attributable to common stockholders, and the
related per share amounts, as presented above, is higher than the
previously reported amount by $9.3 million ($0.15 per basic and diluted
share) in 2002 and is lower than the previously reported amount by $5.0
million ($0.08 per basic and diluted share) in 2001. Total assets and total
stockholders' equity, as presented above, are higher than the previously
reported amounts by $19.0 million at December 31, 2003, $30.4 million at
December 31, 2002 and $21.1 million at December 31, 2001.
(2) See the notes to the Consolidated Financial Statements and Item 7 - MD&A
for items that materially affect the 2005, 2004 and 2003 periods. In 2002,
the Company recorded a $27.5 million pre-tax impairment charge to other
non-operating expense related to the Company's investment in Special Metals
Corporation preferred securities. In 2001, the Company recorded (i) net
other operating income of $73 million related to the settlement of
litigation between TIMET and Boeing, (ii) a $10.8 million pre-tax equipment
impairment charge to cost of sales, (iii) a $3.3 million charge to cost of
sales for costs related to a tungsten inclusion matter and (iv) a $61.5
million pre-tax impairment charge to other non-operating expense related to
the Company's investment in Special Metals Corporation preferred
securities.
(3) Amounts have been adjusted to reflect (i) the Company's two-for-one stock
split which became effective after the close of trading on February 16,
2006, (ii) the Company's two-for-one stock split which became effective
after the close of trading on September 6, 2005, (iii) the Company's
five-for-one stock split which became effective after the close of trading
on August 27, 2004 and (iv) the Company's one-for-ten reverse stock split
which became effective after the close of trading on February 14, 2003.
(4) Includes restricted cash and cash equivalents of $0.1 million in 2005, $0.7
million in 2004, $2.2 million in 2003 and $0.1 million in each of 2002 and
2001.
(5) Bank indebtedness represents notes payable and current and noncurrent debt.
(6) Shipments in metric tons. Average selling prices stated per kilogram.
(7) Order backlog is defined as unfilled purchase orders (including those under
consignment arrangements), which are generally subject to deferral or
cancellation by the customer under certain conditions.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview. Aggregate shipment volumes for titanium mill products in 2005 was
derived from the following sectors:
TIMET Titanium Industry (1)
---------------------------------- ----------------------------------
Mill product Mill product
shipments % of total shipments % of total
--------------- -------------- --------------- ---------------
(Metric tons) (Metric tons)
Commercial aerospace 7,492 59% 24,000 35%
Military 1,981 16% 6,200 9%
Industrial 2,677 21% 35,600 52%
Emerging markets 510 4% 2,700 4%
--------------- -------------- --------------- ---------------
12,660 100% 68,500 100%
=============== ============== =============== ===============
--------------------------------------------------------------------------------------------------------------------
(1) Estimates based on the Company's industry experience and information
obtained from publicly-available external resources (e.g., United States
Geological Survey, International Titanium Association and Japan Titanium
Society).
The titanium industry derives a substantial portion of its demand from the
highly cyclical commercial aerospace sector. As shown in the table, the
Company's business is more dependent on commercial aerospace demand than is the
overall titanium industry, and the Company's sales growth during 2005 has
benefited from growth in this sector. The Company's 2005 revenue from sales of
melted and mill products to the commercial aerospace sector increased by 51%
compared to 2004.
Effective July 1, 2005, the Company entered into a new LTA with Boeing for
the purchase and sale of titanium products. The new LTA expires on December 31,
2010 and provides for, among other things, (i) mutual annual purchase and supply
commitments by both parties, (ii) continuation of the existing buffer inventory
program currently in place for Boeing and (iii) certain improved product
pricing, including certain adjustments for raw material cost fluctuations.
Beginning in 2006, the new LTA also replaces the take-or-pay provisions of the
previous LTA with an annual makeup payment early in the following year in the
event Boeing purchases less than its annual volume commitment in any year.
Effective January 1, 2005, the Company changed its method for inventory
determination from the last-in, first-out ("LIFO") cost method to the specific
identification cost method for the approximate 40% of the Company's consolidated
inventories previously accounted for under the LIFO cost method. In accordance
with GAAP, the Company's consolidated financial statements as of December 31,
2004, and for the years ended December 31, 2004 and 2003, have been
retroactively restated for this change in accounting principle. See Notes 2 and
3 to the Consolidated Financial Statements.
In November 2004, pursuant to an agreement with Basic Management, Inc. and
certain of its affiliates ("BMI"), the Company sold certain property located
adjacent to its Henderson, Nevada plant site to BMI, a 32%-owned indirect
subsidiary of Valhi, and recorded a $12.0 million deferred gain related to the
cash proceeds received in November 2004. During the second quarter of 2005, the
Company ceased using the property and, accordingly, recognized a $13.9 million
non-operating gain related to the sale of such property, which is comprised of
(i) the previously reported $12.0 million cash proceeds received in November
2004, (ii) the reversal of $0.6 million previously accrued by the Company for
potential environmental issues related to the property and (iii) an additional
$1.2 million cash payment received from BMI in June 2005.
During 2005, the Company reversed $36.9 million of the valuation allowance
attributable to its U.S. deferred income tax asset and $13.2 million of the
valuation allowance attributable to its U.K. deferred income tax asset. See
"Results of Operations - Income taxes" and Note 16 to the Consolidated Financial
Statements for more information on the Company's income taxes.
In August 2004, the Company completed an exchange offer, pursuant to which
the Company had offered to exchange all of the 4,024,820 outstanding BUCS issued
by the Capital Trust for shares of the Company's Series A Preferred Stock at the
exchange rate of one share of Series A Preferred Stock for each BUCS. Based upon
the 3,909,103 BUCS tendered and accepted for exchange as of the close of the
offer on August 31, 2004, the Company issued 3,909,103 shares of Series A
Preferred Stock in exchange for such BUCS. During the third quarter of 2004, the
Company recognized a $15.5 million non-cash, non-operating gain related to the
BUCS exchange. During the third and fourth quarters of 2005, an aggregate of
926,490 shares of Series A Preferred Stock were converted into 6,176,600 shares
of TIMET common stock. As of December 31, 2005, there were 2,982,613 shares
outstanding of the Series A Preferred Stock. Subsequent to December 31, 2005 and
through March 10, 2006, an additional 346,016 shares of Series A Preferred Stock
were converted into 2,306,765 shares of TIMET common stock. See Note 12 to the
Consolidated Financial Statements.
Summarized financial information. The following table summarizes certain
information regarding the Company's results of operations for the past three
years. Average selling prices, as reported by the Company, are a reflection not
just of actual selling prices received by the Company, but also include other
related factors such as currency exchange rates and customer and product mix in
a given period. Consequently, changes in average selling prices from period to
period will be impacted by changes occurring not just in actual prices, but by
these other factors as well. The percentage change information presented below
represents changes from the respective prior year. See "Results of Operations -
Outlook" for further discussion of the Company's business expectations for 2006.
Year ended December 31,
------------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
($ in thousands, except product shipment data)
Net sales:
Melted products $ 112,252 $ 72,092 $ 57,409
Mill products 528,555 364,248 279,563
Other products 108,970 65,488 55,132
Other (1) - - (6,800)
--------------- --------------- ---------------
Net sales $ 749,777 $ 501,828 $ 385,304
Gross margin 199,362 63,677 5,644
Gross margin percent of net sales 27% 13% 1%
Melted products shipments:
Volume (metric tons) 5,655 5,360 4,725
Average selling prices ($ per kilogram) $ 19.85 $ 13.45 $ 12.15
Mill products shipments:
Volume (metric tons) 12,660 11,365 8,875
Average selling prices ($ per kilogram) $ 41.75 $ 32.05 $ 31.50
Percentage change in:
Sales volume:
Melted products +6 +13 +97
Mill products +11 +28 -
Average selling prices:
Melted products +48 +11 -16
Mill products +30 +2 -
Selling prices - excludes changes in product mix:
Melted products +35 +7 -12
Mill products in U.S. dollars +27 +6 -3
Mill products in billing currencies (2) +27 +2 -7
------------------------------------------------------------------------------------------------------------------
(1) Represents the effect of a $6.8 million reduction to sales related to the
termination of a purchase and sale agreement with Wyman-Gordon. See
"Results of Operations -- 2004 operations."
(2) Excludes the effect of changes in foreign currencies.
Based upon the terms of the Company's previous LTA with Boeing, the Company
received an annual $28.5 million (less $3.80 per pound of titanium product sold
to Boeing subcontractors in the preceding year) customer advance from Boeing in
January of each year related to Boeing's purchases from TIMET for that year.
Effective July 1, 2005, the Company entered into a new LTA with Boeing pursuant
to which, beginning in 2006, these take-or-pay provisions were replaced with an
annual makeup payment early in the following year in the event Boeing purchases
less than its annual commitment in any year. The previous LTA was structured as
a take-or-pay agreement such that Boeing forfeited $3.80 per pound of its
advance payment in the event that its orders for delivery were less than 7.5
million pounds in any given calendar year. The Company recognized income to the
extent Boeing's year-to-date orders for delivery plus TIMET's maximum quarterly
volume obligations for the remainder of the year totaled less than 7.5 million
pounds. This income was recognized as other operating income and was not
included in sales revenue, sales volume or gross margin. Based on actual
purchases of approximately 3.0 million pounds during 2005, the Company
recognized $17.1 million of take-or-pay income for the year ended December 31,
2005. The Company recognized $22.1 million and $23.1 million of such income
during 2004 and 2003, respectively. Had the Company not benefited from such
provisions, the Company's results would have been as follows:
Year ended December 31,
--------------------------------------------------------
2005 2004 2003
---------------- ---------------- ----------------
(In thousands)
Operating income (loss), as reported $ 171,075 $ 43,036 $ (5,954)
Less take-or-pay income 17,134 22,093 23,083
---------------- ---------------- ----------------
Operating income (loss), excluding take-or-pay $ 153,941 $ 20,943 $ (29,037)
================ ================ ================
2005 operations. Melted product sales increased 56% and mill product sales
increased 45% during 2005 as compared to 2004, principally as a result of higher
average selling prices and increased sales volume due to greater market demand
across all markets, especially commercial aerospace. Large commercial aircraft
deliveries increased from 600 in 2004 to 650 in 2005, and 2006 deliveries are
expected to be 840 aircraft. As previously discussed, a substantial portion of
the Company's business is tied to the commercial aerospace industry, and sales
of titanium generally precede aircraft deliveries by about one year. Therefore,
the Company's 2005 net sales have significantly benefited from the increase in
production of large commercial aircraft scheduled for delivery in 2006.
Average selling prices use actual customer and product mix and foreign
currency exchange rates prevailing during the respective periods. The Company's
melted products are generally sold only in U.S. dollars. Melted product average
selling prices during 2005, as compared to 2004, were positively affected by
current market conditions and changes in customer and product mix. Mill product
average selling prices during 2005, as compared to 2004, were positively
affected by changes in customer and product mix and by the weakening of the U.S.
dollar compared to both the British pound sterling and the euro.
Gross margin (net sales less cost of sales) increased during 2005 as
compared to 2004 primarily as a result of the improved average selling prices
for both melted and mill products as compared to 2004, partially offset by
increased raw material costs and higher energy costs. Gross margin during 2005
includes an additional $21.1 million from the sale of titanium scrap (which the
Company cannot economically recycle) and other non-mill products as compared to
2004. Additionally, gross margin was positively impacted by improved plant
operating rates during 2005 (80%) as compared to 2004 (73%). Gross margin during
2004 was favorably impacted by a $1.6 million reduction in cost of sales related
to the modification of the Company's vacation policy. On January 1, 2004, the
Company modified its vacation policy for its U.S. salaried employees, whereby
such employees no longer accrue their entire year's vacation entitlement on
January 1, but rather accrue the current year's vacation entitlement over the
course of the year. Gross margin during 2005 was adversely impacted by $6.0
million of additional costs as compared to 2004 related to the accrual of
certain performance-based employee incentive compensation payments and a $1.2
million noncash impairment charge related to the Company's abandonment of
certain manufacturing equipment.
Selling, general, administrative and development expenses increased 19%,
from $44.9 million during 2004 to $53.6 million during 2005, principally as a
result of (i) $3.7 million of increased personnel costs (including $1.4 million
of additional employee incentive compensation costs) partially as a result of
headcount increases during 2005, (ii) $1.2 million of additional auditing and
consulting costs partially related to the Company's compliance with the
Sarbanes-Oxley Act's internal control requirements and (iii) increases during
2005 for legal, travel, insurance and other such costs.
Equity in earnings of joint ventures increased 296%, from $1.3 million
during 2004 to $5.1 million during 2005, due to an increase in the operating
results of VALTIMET, the Company's minority owned welded tube joint venture.
During 2005, VALTIMET benefited from both stronger demand and increased pricing
in the industrial tubing market.
Net other operating income (expense) decreased 12% from income of $23.0
million during 2004 to income of $20.3 million during 2005, principally due to a
decrease in the amount of previously discussed take-or-pay income recognized by
the Company during 2005. See Note 15 to the Consolidated Financial Statements.
2004 operations. Melted product sales increased 26% and mill product sales
increased 30% during 2004 as compared to 2003, principally as a result of
increased sales volume due to greater market demand and/or share gains across
all markets. More specifically, large commercial aircraft deliveries increased
from 575 in 2003 to 602 in 2004 and the Company's 2004 net sales significantly
benefited from the increase in production of large commercial aircraft scheduled
for delivery in 2005.
Melted product average selling prices during 2004, as compared to 2003,
were positively affected by current market conditions and changes in customer
and product mix. Mill product average selling prices during 2004, as compared to
2003, were positively affected by the weakening of the U.S. dollar compared to
both the British pound sterling and the euro and negatively affected by changes
in customer and product mix.
Gross margin increased during 2004 as compared to 2003 primarily as a
result of improved plant operating rates (from 56% during 2003 to 73% during
2004), partially offset by increased raw material costs and higher energy costs.
The Company's gross margin during 2004 was also favorably impacted by the
previously discussed modification of the Company's vacation policy and adversely
impacted by an additional $10.5 million charge to cost of sales related to the
accrual of certain employee incentive compensation payments, as compared to
2003. Comparatively, gross margin during 2003 was impacted by (i) a $1.7 million
reduction in cost of sales related to a revision of the Company's estimate of
probable loss associated with a previously reported tungsten inclusion matter
and (ii) a $6.8 million reduction in sales related to the previously discussed
termination of a purchase and sale agreement with Wyman-Gordon.
Selling, general, administrative and development expenses increased 23%,
from $36.4 million during 2003 to $44.9 million during 2004, principally as a
result of (i) a $2.8 million accrual related to certain employee incentive
compensation payments expected to be made in 2005, (ii) $2.0 million of
additional auditing and consulting costs relative to the Company's compliance
with the Sarbanes-Oxley Act's internal control requirements and (iii) $1.0
million of increased costs related to the Company's intercompany services
agreement with Contran Corporation ("Contran").
Equity in earnings of joint ventures increased 183%, from $0.5 million
during 2003 to $1.3 million during 2004, due to an increase in the operating
results of VALTIMET.
Net other operating income (expense) decreased 6% from income of $24.4
million during 2003 to income of $23.0 million during 2004, principally due to a
decrease in the amount of previously discussed take-or-pay income recognized by
the Company during 2004. See Note 15 to the Consolidated Financial Statements.
Non-operating income (expense).
Year ended December 31,
------------------------------------------------------
2005 2004 2003
--------------- ---------------- ---------------
(In thousands)
Interest expense on bank debt $ (3,302) $ (2,649) $ (2,017)
Interest expense on debt payable to the Capital Trust (661) (9,802) (14,402)
--------------- ---------------- ---------------
$ (3,963) $ (12,451) $ (16,419)
=============== ================ ===============
Dividends and interest income $ 2,025 $ 687 $ 383
Equity in earnings of common
securities of the Capital Trust 279 424 432
Gain on BUCS exchange, net - 15,465 -
Gain on sale of property 13,881 - -
Foreign exchange gain (loss), net 2,288 (477) (189)
Other, net (245) 101 (920)
--------------- ---------------- ---------------
$ 18,228 $ 16,200 $ (294)
=============== ================ ===============
Interest expense on bank debt in 2005 increased 25% compared to 2004,
primarily due to higher average outstanding borrowings during 2005 compared to
2004, which the Company used primarily to support its accumulation of inventory
to meet expected customer demand during 2006 as well as for the construction of
the water conservation facility at the Company's Henderson, Nevada location.
Interest expense on bank debt in 2004 increased 31% compared to 2003, primarily
due to higher average outstanding borrowings during 2004 compared to 2003, which
the Company used primarily to support higher inventory levels. The Company
currently expects interest expense on bank debt in 2006 will approximate 2005
levels.
Prior to 2004, annual interest expense on the Company's debt payable to the
Capital Trust approximated $13.7 million, exclusive of any accrued interest on
deferred interest payments. On September 1, 2004, the Company exchanged 97.1% of
its outstanding BUCS for its Series A Preferred Stock, resulting in a $15.5
million non-cash, non-operating gain. On September 1, 2005, the Company and the
Capital Trust agreed to the cancellation of 120,907 of the Capital Trust's
common securities and a corresponding cancellation of $6.0 million of the
Company's Subordinated Debentures (see "Liquidity and Capital Resources - Other"
and Note 12 to the Consolidated Financial Statements). Interest expense related
to the remaining debt payable to the Capital Trust ($5.9 million at December 31,
2005) continues to accrue at 6.625% per year.
During 2002, the Company exercised its right to defer interest payments on
the Subordinated Debentures, effective for the December 1, 2002 scheduled
interest payment. Interest continued to accrue at the 6.625% coupon rate on the
principal and unpaid interest until the Company's Board of Directors approved
resumption of scheduled quarterly interest payments on the Subordinated
Debentures beginning with the payment on June 1, 2004. The Company's Board also
approved payment of all previously deferred interest on the Subordinated
Debentures. On April 15, 2004, the Company paid the deferred interest in the
amount of $21.7 million, $21.0 million of which related to the BUCS.
Dividends and interest income during 2005 and 2004 consisted of dividends
received on the Company's investments in marketable securities and interest
income earned on cash and cash equivalents. Dividends and interest income during
2003 consisted solely of interest income earned on cash and cash equivalents.
During the second quarter of 2005, the Company recognized a $13.9 million
non-operating gain related to the sale of property. See further discussion in
"Results of Operations - Overview."
Income taxes. The Company operates in several tax jurisdictions and is
subject to varying income tax rates. As a result, the geographic mix of pretax
income or loss can impact the Company's overall effective tax rate. For the
years ended December 31, 2005, 2004 and 2003, the Company's income tax rate
varied from the U.S. statutory rate primarily due to changes in the deferred
income tax valuation allowance related to the Company's tax attributes with
respect to the "more-likely-than-not" recognition criteria during those periods.
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the first
quarter of 2005, based on the Company's recent history of U.S. income, its near
term outlook and the effect of its change in method of inventory determination
from the LIFO cost method to the specific identification cost method for U.S.
federal income tax purposes (see Note 2), the Company changed its estimate of
its ability to utilize the tax benefits of its U.S. net operating loss ("NOL")
carryforwards, alternative minimum tax ("AMT") credit carryforwards and other
net deductible temporary differences (other than the majority of the Company's
capital loss carryforwards). Consequently, the Company determined that its net
deferred income tax asset related to such U.S. tax attributes and other net
deductible temporary differences now meet the "more-likely-than-not" recognition
criteria. Accordingly, the Company reversed $36.9 million of the valuation
allowance attributable to such U.S. deferred income tax asset during 2005 ($8.6
million in the fourth quarter).
During the first quarter of 2005, based on the Company's recent history of
U.K. income, its near term outlook and its historic U.K. profitability, the
Company also changed its estimate of its ability to utilize its net deductible
temporary differences and other tax attributes related to the U.K., primarily
comprised of (i) the future benefits associated with the reversal of its U.K.
minimum pension liability deferred income tax asset and (ii) the benefits of its
U.K. NOL carryforward. Consequently, the Company determined that its net
deferred income tax asset in the U.K. now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed $13.2 million of the
valuation allowance attributable to such deferred income tax asset during 2005
($0.1 million in the fourth quarter).
During 2004, due to a change in estimate of the Company's ability to
utilize the benefits of its NOL carryforwards in Germany, the Company determined
that its deferred income tax asset in Germany met the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed the $0.7 million
valuation allowance attributable to such deferred income tax asset. In addition,
the Company's deferred income tax asset valuation allowance related to income
from continuing operations decreased by $16.4 million during 2004, primarily due
to the utilization of the U.S. and U.K. NOL carryforwards, the benefit of which
had previously not met the "more-likely-than-not" recognition criteria.
During the second quarter of 2005 and the fourth quarter of 2004, the
Company recognized a deferred income tax benefit related to a $0.5 million and
$4.2 million, respectively, decrease in the Company's U.S. deferred income tax
asset valuation allowance attributable to the Company's recognition, for U.S.
income tax purposes only, of a capital gain on the fourth quarter sale of
certain property located at the Company's Henderson, Nevada facility (see Note
6). The Company recognized a corresponding deferred income tax expense in 2005,
when the gain was recognized under accounting principles generally accepted in
the United States of America. The Company utilized a portion of its U.S. capital
loss carryforward to offset the income taxes generated from the sale of such
property.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provides for a special 85% deduction for certain dividends
received from controlled foreign corporations in 2005. In the second quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would benefit from the special dividend received deduction, but the
Company did not distribute dividends under the Act until the third quarter of
2005. In the third quarter of 2005, the Company executed a reinvestment plan and
distributed $19 million of earnings from its European subsidiaries, which
qualified for the special dividend received deduction and, in accordance with
the requirements of FASB Staff Position No. 109-2, recognized the $1.0 million
income tax related to such repatriation. Additionally, in the fourth quarter of
2005, the Company determined that an additional $10 million of repatriations
would qualify for the special dividend received deduction, and the Company
recognized an additional $0.5 million income tax related to the fourth quarter
repatriation. The Company has not provided for U.S. deferred income taxes or
foreign withholding taxes on basis differences in its non-U.S. consolidated
subsidiaries that result primarily from undistributed earnings the Company
intends to reinvest indefinitely. The new law also provides for a special
deduction from U.S. taxable income equal to a specified percentage of a U.S.
company's qualified income from domestic manufacturing activities (as defined).
The Company believes that the majority of its operations meet the definition of
qualified domestic manufacturing activities. However, the Company did not derive
any benefit from the special manufacturing deduction in 2005, because the
Company's existing U.S. NOL carryforwards fully offset its 2005 U.S. taxable
income.
In June 2005, the State of Ohio enacted a new tax law, which phases out
Ohio's existing income tax system over the next five years and replaces it with
a tax based on gross receipts. In the second quarter of 2005, as a result of
this phase out, the Company reduced its deferred income tax asset related
primarily to its Ohio NOL carryforwards by $0.6 million. In the fourth quarter
of 2005, due primarily to updated income forecasts and revised timing
information on the recognition of certain temporary differences, the Company
increased its deferred income tax asset related primarily to its Ohio NOL
carryforwards by $0.3 million. The net impact of these adjustments for 2005 was
a decrease of $0.3 million.
The provision for income taxes in 2005 includes $4.4 million of deferred
income taxes resulting from the elimination of the Company's minimum pension
liability equity adjustment component of accumulated other comprehensive income
related to the Company's U.S. defined benefit pension plan. In accordance with
GAAP, the Company did not recognize a deferred income tax benefit related to a
portion of the minimum pension equity adjustment previously recognized, as the
Company had also recognized a deferred income tax asset valuation allowance
related to its U.S. net operating loss carryforward and other U.S. net
deductible temporary differences during a portion of the periods in which the
minimum pension equity adjustment had previously been recognized. A portion of
such valuation allowance recognized ($4.4 million) was recognized through the
pension liability component of other comprehensive income. As discussed, during
2005 the Company concluded recognition of such deferred income tax asset
valuation allowance was no longer required, and the reversal of all of such
valuation allowance was recognized through the provision for income taxes
included in the determination of net income, including the $4.4 million portion
of the valuation allowance which was previously recognized through other
comprehensive income. As of December 31, 2005, the Company was no longer
required to recognize a minimum pension liability related to its U.S. plan, and
the Company reversed the minimum pension liability previously recognized in
other comprehensive income. After the reversal of such minimum pension
liability, which was recognized on a net-of-tax basis, the $4.4 million amount
remained in accumulated other comprehensive income related to the U.S. minimum
pension liability, which is required to be recognized in the provision for
income taxes during the period in which the minimum pension liability is no
longer required to be recognized.
See also Note 16 to the Consolidated Financial Statements.
Dividends on Series A Preferred Stock. Shares of the Company's Series A
Preferred Stock are convertible, at any time, at the option of the holder
thereof, into six and two-thirds shares of the Company's common stock, subject
to adjustment in certain events. The Series A Preferred Stock is not mandatorily
redeemable, but is redeemable at the option of the Company at any time after
September 1, 2007. When, as and if declared by the Company's board of directors,
holders of the Series A Preferred Stock are entitled to receive cumulative cash
dividends at the rate of 6.75% of the $50 per share liquidation preference per
annum per share (equivalent to $3.375 per annum per share). The Company paid
dividends of $12.5 million during 2005 and $3.3 million during 2004 to holders
of the Series A Preferred Stock. Subsequent to December 31, 2005, the Company's
board of directors declared a dividend of $0.84375 per share, payable on March
15, 2006 to holders of record of Series A Preferred Stock as of the close of
trading on March 1, 2006. Based on the 2,636,597 shares of Series A Preferred
Stock outstanding as of March 10, 2006, TIMET would expect to pay approximately
$8.9 million of dividends on these shares during 2006.
Cumulative effect of change in accounting principle. On January 1, 2003,
the Company adopted Statement of Financial Accounting Standards ("SFAS") No.
143, Accounting for Asset Retirement Obligations, and recognized (i) an asset
retirement cost capitalized as an increase to the carrying value of its
property, plant and equipment of approximately $0.2 million, (ii) accumulated
depreciation on such capitalized cost of approximately $0.1 million and (iii) a
liability for the asset retirement obligation of approximately $0.3 million. The
asset retirement obligation recognized relates primarily to landfill closure and
leasehold restoration costs. See Note 2 to the Consolidated Financial
Statements.
European operations. The Company has substantial operations located in
Europe, principally in the United Kingdom, France and Italy. Approximately 39%
of the Company's sales revenue originated in Europe in 2005, of which
approximately 58% was denominated in the British pound sterling or the euro.
Certain purchases of raw materials, principally titanium sponge and alloys, for
the Company's European operations are denominated in U.S. dollars, while labor
and other production costs are primarily denominated in local currencies. The
functional currencies of the Company's European subsidiaries are those of their
respective countries, and the European subsidiaries are subject to exchange rate
fluctuations that may impact reported earnings and may affect the comparability
of period-to-period operating results. Borrowings of the Company's European
operations may be in U.S. dollars or in functional currencies. The Company's
export sales from the U.S. are denominated in U.S. dollars and as such are not
subject to currency exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. Net currency transaction gains or losses included in results of
operations were a $2.3 million gain in 2005 and losses of $0.5 million in 2004
and $0.2 million in 2003. At December 31, 2005, consolidated assets and
liabilities denominated in currencies other than functional currencies were
approximately $51.2 million and $46.4 million, respectively, consisting
primarily of U.S. dollar cash, accounts receivable and accounts payable.
VALTIMET has entered into certain derivative financial instruments that
qualify as cash flow hedges under accounting principles generally accepted in
the United States of America ("GAAP"). The Company's pro-rata share of
VALTIMET's unrealized net gains on such derivative financial instruments is
included as a component of other comprehensive income.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 18 to the Consolidated Financial Statements.
Outlook. The Outlook section contains a number of forward-looking
statements, all of which are based on current expectations and exclude the
effect of potential future charges related to restructurings, asset impairments,
valuation allowances, changes in accounting principles and similar items, unless
otherwise noted. Undue reliance should not be placed on these statements, as
more fully discussed in the "Forward-Looking Information" statement of this
Annual Report. Actual results may differ materially. See also Notes to the
Consolidated Financial Statements regarding commitments, contingencies, legal
matters, environmental matters and other matters, including new accounting
principles, which could materially affect the Company's future business, results
of operations, financial position and liquidity.
In 2005, TIMET achieved all time record levels for net sales, operating
income and net income. These levels were largely driven by increased demand in
the commercial aerospace sector that, when coupled with the relatively short
supply of raw materials, resulted in average selling prices for both melted and
mill products reaching their highest historical levels at $19.85 and $41.75 per
kilogram, respectively. The Company expects that the current up-cycle will
continue beyond 2006.
The Company continues to see the availability of certain raw materials
tighten, and, consequently, the prices for such raw materials increase. The
Company currently expects that the shortage in certain raw materials is likely
to continue throughout 2006, which could limit the Company's ability to produce
enough titanium products to fully meet customer demand. In addition, TIMET has
certain long-term customer agreements that will somewhat limit the Company's
ability to pass on all of its increased raw material costs. However, the Company
expects that the impact of higher average selling prices for melted and mill
products in 2006 will more than offset such increased raw materials costs.
As compared to 2005, the Company currently expects its 2006 net sales
revenue to increase by 35% to 50% to between $1.0 billion and $1.1 billion. Mill
product sales volume, which was 12,660 metric tons in 2005, is expected to range
from 14,500 and 15,000 metric tons in 2006, an increase of 15% to 18%. Melted
product sales volume, which was 5,655 metric tons in 2005, is expected to remain
relatively unchanged in 2006. Melted product average selling prices are expected
to increase by 75% to 80% and mill product average selling prices are expected
increase by 25% to 30%, as compared to 2005.
The Company's cost of sales is affected by a number of factors including
customer and product mix, material yields, plant operating rates, raw material
costs, labor costs and energy costs. Raw material costs, which include sponge,
scrap and alloys, represent the largest portion of the Company's manufacturing
cost structure, and, as previously discussed, continued cost increases are
expected during 2006. Scrap and certain alloy prices have continued their upward
rise, and increased energy costs also continue to have a negative impact on
gross margin. The Company currently expects production volumes to continue to
increase in 2006, with overall capacity utilization expected to approximate 88%
in 2006 (as compared to 80% in 2005). However, practical capacity utilization
measures can vary significantly based on product mix.
Selling, general, administrative and development expenses are expected to
increase slightly but decrease as a percentage of sales. Under the terms of the
new Boeing LTA, as previously discussed, the Company does not currently expect
Boeing to incur a makeup payment for 2006 as Boeing is expected to purchase at
least the minimum specified volumes from the Company.
The Company expects its 2006 operating income to increase 50% to 65% over
2005, to between $257 million and $282 million.
Capital expenditures during 2006 are expected to range from $90 million to
$100 million. The increased spending over 2005 primarily reflects $23 million
related to the expansion of the sponge plant in Henderson, Nevada and additional
capacity improvements as the Company continues to respond to the increased
demand by its customers. Depreciation and amortization should approximate $36
million in 2006.
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined GAAP, the Company
has provided the following non-GAAP financial disclosures that it believes may
provide useful information to investors:
o The Company discloses percentage changes in its mill and melted
product selling prices in U.S. dollars, which have been adjusted to
exclude the effects of changes in product mix. The Company believes
such disclosure provides useful information to investors by allowing
them to analyze such changes without the impact of changes in product
mix, thereby facilitating period-to-period comparisons of the relative
changes in average selling prices. Depending on the composition of
changes in product mix, the percentage change in selling prices
excluding the effect of changes in product mix can be higher or lower
than such percentage change would be using the actual product mix
prevailing during the respective periods;
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies, which also excludes the effects of changes in foreign
currency exchange rates. The Company believes such disclosure provides
useful information to investors by allowing them to analyze such
changes without the impact of changes in foreign currency exchange
rates, thereby facilitating period-to-period comparisons of the
relative changes in average selling prices in the various actual
billing currencies. Generally, when the U.S. dollar strengthens
(weakens) against other currencies, the percentage change in selling
prices in billing currencies will be higher (lower) than such
percentage changes would be using actual exchange rates prevailing
during the respective periods; and
o The Company has disclosed operating income excluding the impact of the
Boeing take-or-pay income. The Company believes this provides
investors with useful information to better analyze the Company's
business and possible future earnings. Effective July 1, 2005, the
Company entered into a new LTA with Boeing, replacing the take-or-pay
provisions with an annual makeup payment early in the following year
in the event Boeing purchases less than its annual volume commitment
in any year. See "Summarized Financial Information" for additional
information regarding the Boeing LTA.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for each of the past three years are
presented below. The following should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto.
Year ended December 31,
------------------------------------------------------
2005 2004 2003
--------------- ---------------- ---------------
(In thousands)
Cash provided (used) by:
Operating activities $ 72,896 $ (22,433) $ 65,821
Investing activities (61,486) (44,528) (14,534)
Financing activities (28) 38,742 (22,068)
--------------- ---------------- ---------------
Net cash provided (used) by operating,
investing and financing activities $ 11,382 $ (28,219) $ 29,219
=============== ================ ===============
Operating activities. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. The aerospace
industry is cyclical, and changes in economic conditions within the aerospace
industry significantly impact the Company's earnings and operating cash flows.
Cash flow from operations has been a primary source of the Company's liquidity.
Changes in titanium pricing, production volume and customer demand, among other
things, could significantly affect the Company's liquidity.
Certain items included in the determination of net loss have an impact on
cash flows from operating activities, but the impact of such items on cash may
differ from their impact on net loss. For example, pension expense and
postretirement healthcare and life insurance ("OPEB") expense will generally
differ from the outflows of cash for payment of such benefits. In addition,
relative changes in assets and liabilities generally result from the timing of
production, sales and purchases. Such relative changes can significantly impact
the comparability of cash flow from operations from period to period, as the
income statement impact of such items may occur in a different period than that
in which the underlying cash transaction occurs. For example, raw materials may
be purchased in one period, but the cash payment for such raw materials may
occur in a subsequent period. Similarly, inventory may be sold in one period,
but the cash collection of the receivable may occur in a subsequent period.
The Company's net income increased from $47.7 million for the year ended
December 31, 2004 to $155.9 million for the year ended December 31, 2005.
Accounts receivable increased during 2005 primarily due to increased sales,
as fourth quarter 2005 net sales, the primary source of the year end accounts
receivable balance, increased 61% over the year ago period. Similarly, accounts
receivable increased during 2004 primarily due to a 36% increase in fourth
quarter 2004 net sales over the fourth quarter of 2003. Accounts receivable
decreased during 2003 primarily due to improved collection efforts with the
Company's customers, partially offset by the weakening of the U.S. dollar
compared to the British pound sterling and the euro.
Inventories increased during each of 2005 and 2004 as a result of increased
capacity utilization and related inventory build in order to meet expected
customer demand during the respective following year, as well as the effects of
increased raw material costs. Inventories decreased during 2003 primarily due to
the Company's concentrated focus on inventory reduction during 2003.
Changes in accounts payable and accrued liabilities reflect, among other
things, the timing of payments to suppliers of titanium sponge, titanium scrap
and other raw material purchases. Accrued liabilities increased during 2005
primarily due to a $7.5 million increase in the Company's accrual for employee
profit sharing payments to be made in 2006. Accrued liabilities increased during
2004 primarily due to (i) a $12.0 million net increase in the Company's accrual
for incentive compensation for potential employee profit sharing payments to be
made in 2005 and (ii) a $1.1 million increase to the Company's accrual for costs
expected to be incurred for environmental remediation at the Company's
Henderson, Nevada facility. These increases were partially offset by (i) payment
of the $2.8 million final installment related to termination of the prior
Wyman-Gordon agreement, (ii) a $1.9 million reduction of the Company's vacation
accrual related to the Company's modification of its vacation policy for its U.S
salaried employees and (iii) a $3.5 million reclassification of the Company's
U.S. defined benefit pension liability from current to noncurrent, as the
Company's short-term cash contribution requirements decreased significantly.
Pursuant to the Company's previous agreement with Boeing, Boeing advanced
TIMET $28.5 million annually less $3.80 per pound of titanium product purchased
by Boeing subcontractors during the preceding year. The Company received a $27.9
million advance for 2005 in January 2005, a $27.9 million advance for 2004 in
January 2004 and a $27.7 million advance for 2003 in January 2003. Effective
July 1, 2005, the Company entered into a new Boeing LTA, which replaced the
previous LTA's take-or-pay provisions with an annual makeup payment early in the
following year in the event Boeing purchases less than its annual volume
commitment in any year. See Note 10 to the Consolidated Financial Statements.
See "Results of Operations - Income taxes" for discussion of the Company's
income taxes.
In October 2002, the Company exercised its right to defer future interest
payments on its Subordinated Debentures held by the Capital Trust, effective
beginning with the Company's December 1, 2002 scheduled interest payment,
although interest continued to accrue at the coupon rate on the principal and
unpaid interest. On April 15, 2004, the Company paid all previously deferred and
accrued interest in the amount of $21.7 million ($21.0 million of which related
to the BUCS) and on June 1, 2004, the Company resumed its quarterly interest
payments on the Subordinated Debentures. Changes in accrued interest on debt
payable to the Capital Trust reflect this activity.
Investing activities. During 2005 and 2004, the Company purchased 146,900
and 2,549,520 shares of CompX International, Inc. ("CompX") Class A common
stock, respectively, for $2.2 million and $32.0 million, respectively. During
2004, the Company purchased 222,100 shares of NL Industries, Inc. ("NL") common
stock for $2.5 million. See further discussion in Note 4 to the Consolidated
Financial Statements.
The Company's capital expenditures were $61.1 million in 2005, $23.6
million in 2004 and $12.5 million in 2003, principally for replacement and
expansion of machinery and equipment and for capacity maintenance. The 2005
amount includes $24.2 million related to the construction of the water
conservation facility and $11.8 million related to the Company's sponge plant
expansion in Henderson, Nevada. The 2004 amount includes $3.9 million related to
construction of the water conservation facility.
During the fourth quarter of 2003, the Company deposited funds into
certificates of deposit and other interest bearing accounts as collateral for
certain Company obligations in lieu of entering into letters of credit. These
deposits, which are restricted as to the Company's use, provide the Company with
interest income as opposed to interest expense incurred through the use of
letters of credit. During each of 2005 and 2004, certain of these deposits were
liquidated in favor of entering into letters of credit because the Company was
primarily a net borrower during these periods and the use of this cash reduced
overall borrowing costs.
Financing activities. Cash used during 2005 was primarily related to $12.5
million of dividends paid on the Series A Preferred Stock and $2.2 million of
dividends paid to CEZUS, partially offset by the Company's net borrowings of
$8.3 million and $6.4 million of proceeds from the issuance of common stock upon
exercise of options. Cash provided during 2004 related primarily to the
Company's net borrowings of $43.2 million, which the Company primarily used to
support the accumulation of inventory in order to meet expected customer demand
for 2005 and also support capital expenditures and the acquisition of marketable
securities. In addition, the Company paid dividends on its Series A Preferred
Stock of $3.3 million and TIMET Savoie made a $0.7 million dividend payment to
CEZUS during 2004. Cash used during 2003 related primarily to the Company's
$19.3 million of net repayments on its outstanding borrowings upon the Company's
receipt of a $27.7 million customer advance in January 2003. Additionally, TIMET
Savoie made a $1.9 million dividend payment to CEZUS during 2003. See further
discussion below in "Liquidity and Capital Resources - Borrowing arrangements."
Borrowing arrangements. As of December 31, 2005, the Company's outstanding
borrowings under its U.S. credit agreement were $40.3 million and excess
availability was approximately $79 million. On February 17, 2006, the Company
entered into a new $175 million long-term credit agreement (the "New U.S.
Facility"), replacing its previous U.S credit agreement, which was terminated on
that date. The New U.S. Facility is secured primarily by the Company's U.S.
accounts receivable, inventory, personal property, intangible assets, a pledge
of 65% of TIMET UK's common stock and a negative pledge on U.S. fixed assets,
and matures in February 2011. Borrowings under the New U.S. Facility accrue
interest at the U.S. prime rate or varying LIBOR-based rates based on a
quarterly ratio of outstanding debt to EBITDA as defined by the agreement. The
New U.S. Facility also provides for the issuance of up to $10 million of letters
of credit.
The New U.S. Facility contains certain restrictive covenants that, among
other things, limit or restrict the ability of the Company to incur debt, incur
liens, make investments, make capital expenditures or pay dividends. The New
U.S. Facility also requires compliance with certain financial covenants,
including a minimum tangible net worth covenant, a fixed charge coverage ratio
and a leverage ratio, and contains other covenants customary in lending
transactions of this type including cross-default provisions with respect to
other debt and obligations of the Company. Borrowings under the New U.S.
Facility are limited to the lesser of $175 million or a formula-determined
amount based upon U.S. accounts receivable, inventory and fixed assets (subject
to pledging fixed assets). Such formula-determined amount only applies if
borrowings exceed 60% of the commitment amount or the leverage ratio exceeds a
certain limitation. At February 17, 2006, approximately $21 million was
outstanding under the New U.S. Facility and $4.4 million of letters of credit
were issued and outstanding. The Company's previous U.S. credit agreement
contained similar covenant compliance requirements, and the Company was in
compliance with all such covenants for all periods during the years ended
December 31, 2005 and 2004.
Under the previous U.S. credit agreement, the Company was required to
maintain a lock box arrangement whereby daily net cash receipts were used to
reduce outstanding borrowings. Accordingly, any outstanding balances under the
previous U.S. credit agreement were classified as a current liability,
regardless of the maturity date of the agreement. As a result of the Company's
entrance into the New U.S. Facility, which does not contain a similar
requirement regarding the application of daily net cash receipts, borrowings
under the Company's previous U.S. credit agreement have been re-classified to
long-term on the Company's balance sheet as of December 31, 2005. Under the
Company's previous U.S. credit agreement, interest accrued at rates based on
LIBOR plus 2% and bank prime rate plus 0.5%. The weighted average interest rate
on borrowings outstanding was 6.4% as of December 31, 2005 and 4.3% as of
December 31, 2004. Borrowings were collateralized by substantially all of the
Company's U.S. assets.
During the second quarter of 2005, the Company's subsidiary, TIMET UK,
terminated its previous credit facility (the "U.K. Facilities") and entered into
a new working capital credit facility (the "New U.K. Facility") that expires on
April 30, 2008. Under the New U.K. facility, TIMET UK may borrow up to
(pound)22.5 million, subject to a formula-determined borrowing base derived from
the value of accounts receivable, inventory and property, plant and equipment.
Borrowings under the New U.K. facility can be in various currencies, including
U.S. dollars, British pounds sterling and euros and are collateralized by
substantially all of TIMET UK's assets. Interest on outstanding borrowings
generally accrues at rates that vary from 1.125% to 1.375% above the lender's
published base rate. The New U.K. facility also contains financial ratios and
covenants customary in lending transactions of this type, including a minimum
net worth covenant. TIMET UK was in compliance with all covenants for all
periods during the year ended December 31, 2005. As of December 31, 2005, the
Company had outstanding borrowings under the New U.K. Facility of $11.1 million,
and excess availability was approximately $28 million. The weighted average
interest rate on borrowings outstanding under the New U.K. facility was 5.6% as
of December 31, 2005.
The U.K. Facilities included revolving and term loan facilities and an
overdraft facility and required the maintenance of certain financial ratios and
amounts, including a minimum net worth covenant and other covenants customary in
lending transactions of this type. TIMET UK was in compliance with all covenants
for all periods during the year ended December 31, 2004. During the second
quarter of 2003, TIMET UK received an interest-bearing intercompany loan from a
U.S. subsidiary of the Company enabling TIMET UK to reduce its long-term
borrowings under the U.K. Facilities to zero. This loan was repaid in full
during the third quarter of 2004. As of December 31, 2004, the Company had no
borrowings under the U.K. Facilities.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries that aggregate the equivalent of $19 million at
December 31, 2005. These facilities accrue interest at various rates and are
payable on demand. At December 31, 2005, approximately $2 million of letters of
credit had been issued under these facilities. As of December 31, 2005 and 2004,
there were no outstanding borrowings under these other facilities, and unused
borrowing availability at December 31, 2005 was approximately $17 million.
No dividends were paid by TIMET on its common stock during 2005, 2004 or
2003. The Company paid dividends on its Series A Preferred Stock in the amount
of $12.5 million in 2005 and $3.3 million in 2004. Subsequent to December 31,
2005, the Company's board of directors declared a dividend of $0.84375 per
share, payable on March 15, 2006 to holders of record of Series A Preferred
Stock as of the close of trading on March 1, 2006.
Contractual commitments. As more fully described in Notes 11, 12, 18 and 19
to the Consolidated Financial Statements, the Company was a party to various
debt, lease and other agreements at December 31, 2005 that contractually commits
the Company to pay certain amounts in the future. The following table summarizes
such contractual commitments that are enforceable and legally binding on the
Company and that specify all significant terms, including pricing, quantity and
date of payment:
Payment Due Date
---------------------------------------------------------------------------
2007/ 2009/ 2011 &
Contractual Commitment 2006 2008 2010 After Total
---------------------- ----------- ------------ ------------ ------------ ------------
(In thousands)
Capital leases (1) $ 28 $ 56 $ 56 $ 50 $ 190
Operating leases 3,103 6,003 4,479 18,512 32,097
Long-term debt (2) - 11,104 - 40,255 51,359
Debt payable to Capital Trust (and
accrued interest thereon at
December 31, 2005) 33 - - 5,852 5,885
Purchase obligations:
Raw materials (3) 108,643 36,715 2,800 2,800 150,958
Other (4) 30,048 18,515 12,990 24,204 85,757
Other contractual obligations (5) 14,026 - - - 14,026
----------- ------------ ------------ ------------ ------------
$ 155,881 $ 72,393 $ 20,325 $ 91,673 $ 340,272
=========== ============ ============ ============ ============
-----------------------------------------------------------------------------------------------------------------------
(1) Includes interest payments due under the capital lease agreements.
(2) Subsequent to December 31, 2005, the Company entered into a new U.S. credit
agreement, which matures in 2011. See Note 11 to the Consolidated Financial
Statements.
(3) These obligations generally relate to the purchase of titanium sponge
pursuant to an LTA that expires on December 31, 2007 (as described in Item
1: Business) and various other open orders or commitments for purchase of
raw materials. The LTA does not contain automatic renewal provisions;
however, the Company may enter into a new agreement to replace the current
LTA in the future.
(4) These obligations generally relate to contractual operating fees paid to
CEZUS for use of a portion of its Ugine, France plant pursuant to an
agreement expiring in 2006 (as described in Item 2: Properties), energy
purchase obligations with BMI which expire in 2010 (as described in Note 18
to the Consolidated Financial Statements), an obligation to Contran under
an intercorporate services agreement ("ISA") for 2006 (as described in Note
18 to the Consolidated Financial Statements), a capital contribution
obligation to BAOTIMET and various other open orders for purchase of
energy, utilities and property and equipment. These obligations are
generally based on an average price and an assumed constant mix of products
purchased, as appropriate. The Company expects to enter into an ISA
annually with Contran subsequent to 2006. All open orders are for delivery
in 2006.
(5) These other obligations are recorded on the Company's balance sheet as of
December 31, 2005 and consist of current income taxes payable, a contract
for removal of environmental waste and obligations related to workers
compensation bonds discussed in "Liquidity and Capital Resources -
Off-balance sheet arrangements."
The Company has excluded any potential commitment for funding of retirement
and postretirement benefit plans from this table. However, such potential future
contributions are discussed below, as appropriate, in "Liquidity and Capital
Resources - Defined benefit pension plans" and "Liquidity and Capital Resources
- Postretirement benefit plans other than pensions."
Off-balance sheet arrangements. As more fully discussed in "Results of
Operations - Non-operating income (expense)," the Company is the primary obligor
on two $1.5 million workers' compensation bonds issued on behalf of Freedom
Forge. The Company has fully expensed the obligation under the first of these
bonds. Based upon current claims analysis, the Company has expensed only $0.2
million on the second bond and although it is potentially obligated for the
remaining $1.3 million, the Company does not currently expect any additional
claims to be filed on this second bond. Additionally, the Company has entered
into letters of credit to collateralize (i) potential workers' compensation
claims in Ohio and Nevada and (ii) future usage of electricity in Nevada. The
Company's excess availability under its U.S. credit agreement has been reduced
by $2.3 million and $2.1 million, respectively, related to such letters of
credit.
The Company has entered into letters of credit to collateralize (i)
potential workers' compensation claims in Ohio and Nevada and (i) future usage
of electricity in Nevada. The Company's excess availability under its U.S.
credit agreement has been reduced by $2.3 million and $2.1 million,
respectively, related to such letters of credit. Additionally, the Company has
entered into a letter of credit to collateralize various business obligations,
wich has reduced the Company's excess availability under its other European
credit facilities by approximately $2 million.
Defined benefit pension plans. As of December 31, 2005, the Company
maintains three defined benefit pension plans - one each in the U.S., the U.K.
and France. Prior to December 31, 2003, the U.S. maintained two plans, which
were merged as of that date. The majority of the discussion below relates to the
U.S. and U.K. plans, as the French plan is not material to the Company's
Consolidated Balance Sheets, Statements of Operations or Statements of Cash
Flows.
The Company recorded consolidated pension expense of $7.9 million in 2005,
$7.7 million in 2004 and $8.9 million in 2003. Pension expense for these
periods, the majority of which related to the U.K. plan, was calculated based
upon a number of actuarial assumptions, most significant of which are the
discount rate and the expected long-term rate of return.
The discount rate the Company utilizes for determining pension expense and
pension obligations is based on a review of long-term bonds (10 to 15 year
maturities) that receive one of the two highest ratings given by recognized
rating agencies (generally Merrill Lynch, Moody's, Solomon Smith Barney and UBS
Warburg) as well as composite indices provided by the Company's actuaries.
Changes in the Company's discount rate over the past three years reflect the
decline in such bond rates during that period. The Company establishes a rate
that is used to determine obligations as of the year-end date and expense for
the subsequent year. The Company used the following discount rate assumptions
for its pension plans:
Discount rates used for:
------------------------------------------------------------------------------------------------
Obligation at Obligation at Obligation at
December 31, 2005 December 31, 2004 December 31, 2003
and expense in 2006 and expense in 2005 and expense in 2004
------------------------------ ------------------------------ ---------------------------
U.S. Plan 5.50% 5.65% 6.00%
U.K. Plan 4.75% 5.30% 5.50%
In developing the Company's expected long-term rate of return assumptions,
the Company evaluates historical market rates of return and input from its
actuaries, including a review of asset class return expectations as well as
long-term inflation assumptions. Projected returns are based on broad equity
(large cap, small cap and international) and bond (corporate and government)
indices as well as anticipation that the plans' active investment managers will
generate premiums above the standard market projections. The Company used the
following long-term rate of return assumptions for its pension plans:
Long-term rates of return used for:
------------------------------------------------------------------------------------------------
Obligation at Obligation at Obligation at
December 31, 2005 December 31, 2004 December 31, 2003
and expense in 2006 and expense in 2005 and expense in 2004
------------------------------ ------------------------------ ---------------------------
U.S. Plan 10.00% 10.00% 10.00%
U.K. Plan 6.70% 7.10% 7.10%
Lowering the expected long-term rate of return on the Company's U.S. plan's
assets by 0.5% (from 10.00% to 9.50%) would have increased 2005 pension expense
by approximately $0.3 million, and lowering the discount rate assumption by
0.25% (from 5.65% to 5.40%) would have increased the Company's U.S. plan's 2005
pension expense by approximately $0.1 million. Lowering the expected long-term
rate of return on the Company's U.K. plan's assets by 0.5% (from 7.10% to 6.60%)
would have increased 2005 pension expense by approximately $0.6 million, and
lowering the discount rate assumption by 0.25% (from 5.30% to 5.05%) would have
increased the Company's U.K. plan's 2005 pension expense by approximately $0.7
million.
During the second quarter of 2003, the Company transferred all of its U.S.
plan's assets into the Combined Master Retirement Trust ("CMRT"). The CMRT is a
collective investment trust established by Valhi to permit the collective
investment by certain master trusts which fund certain employee benefits plans
sponsored by Valhi and certain related companies. A sub account of the CMRT held
10.8% of TIMET common stock at December 31, 2005; however, the Company's plan
assets are invested only in the portion of the CMRT that does not hold TIMET
common stock. At December 31, 2005, Valhi and related entities or persons
(excluding the CMRT) held approximately 41.8% of TIMET's outstanding common
stock and approximately 54.1% of the Company's Series A Preferred Stock. Harold
C. Simmons, Chairman of the Board of Directors of Valhi and TIMET, is the sole
trustee of the CMRT and a member of the trust investment committee for the CMRT.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indices) utilizing both third-party investment
managers as well as investments directed by Mr. Simmons. During the 18-year
history of the CMRT through December 31, 2005, the average annual rate of return
earned by the CMRT, as calculated based on the average percentage change in the
CMRT's net asset value per CMRT unit for each applicable year, has been 14%
(with a 36% return for 2005).
At December 31, 2005, the CMRT's asset mix (based on an aggregate asset
value of $691 million) was 86% U.S. equity securities, 7% foreign equity
securities, 3% debt securities and 4% cash and other. The CMRT`s trustee and
investment committee actively manage the investments within the CMRT. Such
parties have in the past, and may again in the future, periodically change the
relative asset mix based upon, among other things, advice they receive from
third-party advisors and their expectation as to what asset mix will generate
the greatest overall return. Based on the above, the Company set its long-term
rate of return assumption at 10.0% for December 31, 2005 and 2004 pension
obligations and 2006, 2005 and 2004 pension expense for its U.S. plan.
Because of market fluctuations and prior funding strategies, actual asset
allocation as of December 31, 2005 was 84.6% equity securities and 15.4% fixed
income securities for the U.K. plan. During 2003, the trustees for the U.K. plan
selected a new investment advisor (effective in 2004) for the U.K. plan and
modified its asset allocation goals. The Company's future expected long-term
rate of return on plan assets for its U.K. plan is based on an asset allocation
assumption of 60% equity securities and 40% fixed income securities and all
current contributions to the plan are invested wholly in fixed income securities
in order to gradually effect the shift. Based on various factors, including
improved economic and market conditions, gains on the plan assets during 2003
and projected asset mix, the Company increased its assumed long-term rate of
return for December 31, 2003 pension obligations and for 2004 pension expense to
7.10% for its U.K. plan and maintained the assumption for December 31, 2004
pension obligations and for 2005 pension expense. Because all contributions
continue to be put into fixed income securities, the Company expects the plan's
asset mix to continue moving closer to the projected mix, which reflects a
higher percentage of fixed income securities. As such, the Company decreased its
assumed long-term rate of return for December 31, 2005 pension obligations and
for 2006 pension expense to 6.70% for its U.K. plan.
Although the expected rate of return is a long-term measure, the Company
will continue to evaluate its expected rate of return, at least annually, and
will adjust it as considered necessary. The expected return on the fair value of
the plan assets, determined based on the expected long-term rate of return, is a
component of pension expense. This methodology further recognizes actual
investment gains or losses (i.e., the difference between the expected and actual
returns based on the market value of assets) in pension expense through
amortization in future periods based upon the expected average remaining service
life of the plan participants. Unrealized gains or losses may impact future
periods to the extent the accumulated gains or losses are outside the "corridor"
as defined by SFAS No. 87.
Based on an expected rate of return on plan assets of 10.00%, a discount
rate of 5.50% and various other assumptions, the Company estimates that its U.S.
plan will have pension income of approximately $2.8 million in 2006,
approximately $3.2 million in 2007 and approximately $3.7 million in 2008. A
0.25% increase (decrease) in the discount rate would increase (decrease)
projected pension income by approximately $0.1 million in each of 2006, 2007 and
2008. A 0.5% increase (decrease) in the long-term rate of return would increase
(decrease) projected pension income by approximately $0.4 million in 2006 and
$0.5 million in each of 2007 and 2008.
Based on an expected rate of return on plan assets of 6.70%, a discount
rate of 4.75% and various other assumptions (including an exchange rate of
$1.75/(pound)1.00), the Company estimates that pension expense for its U.K. plan
will approximate $6.4 million in 2006, $6.0 million in 2007 and $5.3 million in
2008. A 0.25% increase (decrease) in the discount rate would decrease (increase)
projected pension expense by approximately $0.8 million in 2006 and 2007 and by
$0.7 million in 2008. A 0.5% increase (decrease) in the long-term rate of return
would decrease (increase) projected pension expense by approximately $0.7
million in 2006, $0.8 million in 2007 and $1.0 million in 2008.
Actual future pension expense will depend on actual future investment
performance, changes in future discount rates and various other factors related
to the participants in the Company's pension plans.
The Company made cash contributions of approximately $1.8 million in 2004
and $4.4 million in 2003 to the U.S. plans and cash contributions of
approximately $9.1 million in 2005, $8.2 million in 2004 and $7.3 million in
2003 to the U.K. plan. Based upon the current funded status of the plans and the
actuarial assumptions being used for 2006, the Company believes that it will be
required to make the following cash contributions (exclusive of any required
employee contributions) over the next five years:
Projected cash contributions
-----------------------------------------------------------
U.S. Plan U.K.Plan Total
---------------- ----------------- -----------------
(In millions, and using an exchange
rate of $1.75/(pound)1.00 for U.K. plan )
Year ending December 31,
2006 $ 0.4 $ 8.1 $ 8.5
2007 $ 0.1 $ 8.3 $ 8.4
2008 $ - $ 8.6 $ 8.6
2009 $ - $ 8.9 $ 8.9
2010 $ - $ 9.2 $ 9.2
The U.S. plan(s) paid benefits of approximately $5.6 million in 2005, $5.7
million in 2004 and $5.6 million in 2003, and the U.K. plan paid benefits of
approximately $4.3 million in 2005, $4.7 million in 2004 and $4.3 million in
2003. Based upon current projections, the Company believes the plans will be
required to pay the following benefits over the next ten years:
Projected retirement benefits
-----------------------------------------------------------
U.S. Plan U.K.Plan Total
---------------- ----------------- -----------------
(In millions, and using an exchange
rate of $1.75/(pound)1.00 for U.K. plan )
Year ending December 31,
2006 $ 5.9 $ 4.3 $ 10.2
2007 $ 5.9 $ 4.4 $ 10.3
2008 $ 5.9 $ 4.5 $ 10.4
2009 $ 5.9 $ 4.6 $ 10.5
2010 $ 5.9 $ 4.8 $ 10.7
2011 through 2015 $ 29.4 $ 25.8 $ 55.2
The value of the plans' assets has increased significantly over the past
three years based mainly on performance of the plans' equity securities. The
U.S. plan's assets were $84.7 million, $67.2 million and $60.7 million at
December 31, 2005, 2004 and 2003, respectively, and the U.K. plan's assets were
$138.1 million, $121.0 million and $97.8 million at December 31, 2005, 2004 and
2003, respectively.
The combination of actual investment returns, changing discount rates and
changes in other assumptions has a significant effect on the Company's funded
plan status (plan assets compared to projected benefit obligations). In 2005,
the effect of positive investment returns more than offset the effects of a
decline in the discount rate, thereby moving the U.S. plan into a $5.3 million
over-funded status at December 31, 2005. Whereas, in 2004, the effect of
positive investment returns and cash contributions was more than offset by the
effect of a decline in the discount rate and certain changes in mortality and
other retirement assumptions, thereby increasing in the U.S. plan's under-funded
status by $1.3 million to $11.4 million at December 31, 2004. In 2005 the effect
of positive investment returns in the U.K. plan, as well as the effect of the
strengthening dollar compared to the British pound sterling, more than offset
the decline in the discount rate, thereby reducing the U.K. plan's under-funded
status by $7.2 million to $54.8 million at December 31, 2005. Whereas, in 2004,
the effect of positive investment returns was more than offset by the effect of
a decline in the discount rate and certain changes in mortality and retirement
assumptions, as well as the effect of the weakening dollar compared to the
British pound sterling, thereby increasing the under-funded status of the U.K.
plan by $8.4 million to $62.0 million at December 31, 2004. Based upon the
change in the funded status of the plans during 2005, the Company was able to
reduce its net additional minimum pension liability charge (net of tax) to
equity by $17.2 million, reflecting additional comprehensive income of $16.6
million for the U.S. plan (based on elimination of the additional minimum
pension liability for this plan) and additional comprehensive income of $0.6
million for the U.K. plan.
Postretirement benefit plans other than pensions. The Company provides
limited OPEB benefits to a portion of its U.S. employees upon retirement. The
Company funds such OPEB benefits as they are incurred, net of any retiree
contributions. The Company paid OPEB benefits, net of retiree contributions, of
$2.3 million in 2005, $2.5 million in 2004 and $3.1 million in 2003.
The Company recorded consolidated OPEB expense of $2.8 million in 2005,
$3.0 million in 2004 and $2.7 million in 2003. OPEB expense for these periods
was calculated based upon a number of actuarial assumptions, most significant of
which are the discount rate and the expected long-term health care trend rate.
The discount rate the Company utilizes for determining OPEB expense and
OPEB obligations is the same as that used for the Company's U.S. pension plans.
Lowering the discount rate assumption by 0.25% (from 5.65% to 5.4%) would have
increased the Company's 2005 OPEB expense by less than $0.1 million.
The Company estimates the expected long-term health care trend rate based
upon input from specialists in this area, as provided by the Company's
actuaries. In estimating the health care trend rate, the Company considers
industry trends, the Company's actual healthcare cost experience and the
Company's future benefit structure. For 2005, the Company used a beginning
health care trend rate of 9.29%, which is projected to reduce to an ultimate
rate of 4.0% in 2010. If the health care trend rate changed by 1.00% for each
year, OPEB expense would have increased/decreased by approximately $0.2 million
in 2005. For 2006, the Company is using a beginning health care trend rate of
8.23%, which is projected to reduce to an ultimate rate of 4.0% in 2010.
Based on a discount rate of 5.5%, a health care trend rate as discussed
above and various other assumptions, the Company estimates that OPEB expense
will approximate $2.8 million in 2006, $2.7 million in 2007 and $2.8 million in
2008. A 0.25% increase (decrease) in the discount rate would decrease (increase)
projected OPEB expense by less than $0.1 million in each of 2006, 2007 and 2008.
A 1.0% increase (decrease) in the health care trend rate for each year would
increase (decrease) the projected service and interest cost components of OPEB
expense by approximately $0.2 million in 2006 and by $0.3 million in each of
2007 and 2008.
Based upon current projections, the Company will be required to pay the
following OPEB benefits over the next ten years:
Projected Projected Projected Projected net
gross payments retiree Part D payments
contributions subsidy
---------------- -- ------------------ ---------------- -----------------
(In millions)
Year ended December 31,
2006 $ 3.8 (1.4) (0.2) $ 2.2
2007 $ 4.0 (1.5) (0.4) $ 2.1
2008 $ 4.3 (1.6) (0.4) $ 2.3
2009 $ 4.6 (1.7) (0.5) $ 2.4
2010 $ 4.8 (1.8) (0.5) $ 2.5
2011 through 2015 $ 29.0 (10.8) (3.0) $ 15.2
Environmental matters. See "Business - Regulatory and environmental
matters" in Item 1 and Note 19 to the Consolidated Financial Statements for a
discussion of environmental matters.
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company has in the past, or in light of its current outlook, may in
the future, seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of common stock, purchase or redeem
BUCS or Series A Preferred Stock, sell assets, or take a combination of such
steps or other steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates, discusses
and engages in acquisition, joint venture, strategic relationship and other
business combination opportunities in the titanium, specialty metal and other
industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (ii) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates such transactions, and understands
that Contran, Valhi and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more such
transactions in the future.
During the first nine months of 2004, the Company purchased 2,212,820
shares of CompX International, Inc ("CompX") Class A common shares, representing
approximately 14.6% of the total number of shares of all classes of CompX common
stock outstanding at that date. As of September 30, 2004, NL Industries, Inc.
("NL"), a subsidiary of Valhi, held an additional 68.4% of CompX. Effective on
October 1, 2004, the Company and NL contributed 100% of their respective
holdings on that date of all classes of CompX common stock to CompX Group, Inc.
("CGI") in return for a 17.6% and 82.4% ownership interest in CGI, respectively,
and CGI became the owner of the 83.0% of CompX that the Company and NL had
previously held in the aggregate. The CompX shares are the sole assets of CGI.
The Company's shares of CGI are redeemable at the option of the Company based
upon the market value of the underlying CompX stock held by CGI. The fair value
of the Company's investment in CGI is based on the market value of the
underlying CompX shares.
As of December 31, 2005 and 2004, the Company directly held 483,600 and
336,700, respectively, shares of CompX, which were purchased subsequent to
October 1, 2004. The Company has not contributed any of the shares purchased
subsequent to October 1, 2004 to CGI. Depending upon the Company's evaluation of
the business and prospects of CompX, and upon future developments (including,
but not limited to, performance of the Class A Shares in the market,
availability of funds, alternative uses of funds, and money, stock market and
general economic conditions), the Company may from time to time purchase,
dispose of, or cease buying or selling Class A Shares.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and judgments, and select from a range of possible estimates and
assumptions, that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reported
period.
On an on-going basis, the Company evaluates its estimates, including those
related to allowances for uncollectible accounts receivable, inventory
allowances, asset lives, impairments of investments in marketable securities and
investments accounted for by the equity method, the recoverability of other
long-lived assets, including property and equipment, goodwill and other
intangible assets, pension and other post-retirement benefit obligations and the
related underlying actuarial assumptions, the realization of deferred income tax
assets, and accruals for asset retirement obligations, environmental
remediation, litigation, income tax and other contingencies. The Company bases
its estimates and judgments, to varying degrees, on historical experience,
advice of external specialists and various other factors it believes to be
prudent under the circumstances. Actual results may differ from previously
estimated amounts and such estimates, assumptions and judgments are regularly
subject to revision.
The policies and estimates discussed below are considered by management to
be critical to an understanding of the Company's financial statements because
their application requires the most significant judgments from management in
estimating matters for financial reporting that are inherently uncertain. See
Notes to the Consolidated Financial Statements for additional information on
these policies and estimates, as well as discussion of additional accounting
policies and estimates.
Inventory allowances. Prior to January 1, 2005, approximately 40% of the
Company's inventories were determined using the LIFO method, with the balance
determined primarily using an average cost method. Effective January 1, 2005,
the Company changed its method for inventory costing from the LIFO method to the
specific identification cost method for the inventories previously accounted for
under the LIFO cost method. With the significant volatility seen recently in raw
material prices, the Company believes this change in accounting method provides
a better matching of revenues and expenses. As required by GAAP, the Company has
restated its financial statements for prior periods. See Note 2 to the
Consolidated Financial Statements. The Company periodically reviews its
inventory for estimated obsolescence or unmarketable inventory and records any
write-down equal to the difference between the cost of inventory and its
estimated net realizable value based upon assumptions about alternative uses,
market conditions and other factors.
Impairment of long-lived assets. Generally, when events or changes in
circumstances indicate that the carrying amount of long-lived assets, including
property and equipment and intangible assets, may not be recoverable, the
Company undertakes an evaluation of the assets or asset group. If this
evaluation indicates that the carrying amount of the asset or asset group is not
recoverable, the amount of the impairment would typically be calculated using
discounted expected future cash flows or appraised values. All relevant factors
are considered in determining whether an impairment exists. During 2005, the
Company determined that certain of its manufacturing equipment would no longer
be utilized in its operations, and, accordingly, recognized a $1.2 million
noncash abandonment charge to cost of sales. In 2004, no such events or
circumstances indicated the need to perform such evaluation.
Valuation and impairment of securities. In accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company's
marketable securities, including the shares of CompX contributed by the Company
and held by CGI (based upon the Company's redemption option), are classified as
available-for-sale securities and are carried at fair value based upon quoted
market prices, with unrealized gains and/or losses included in stockholders'
equity as a component of other comprehensive income. The Company evaluates its
investments in marketable securities whenever events or conditions occur to
indicate that the fair value of such investments has declined below their
carrying amounts. If the decline in fair value is judged to be other than
temporary, the carrying amount of the security is written down to fair value. In
2005, no such events or circumstances indicated the need to perform such
evaluation. See Note 4 to the Consolidated Financial Statements for further
discussion.
Deferred income tax valuation allowances. Under SFAS No. 109, Accounting
for Income Taxes, and related guidance, the Company is required to record a
valuation allowance if realization of deferred tax assets is not
"more-likely-than-not." Substantial weight must be given to recent historical
results and near-term projections, and management must assess the availability
of tax planning strategies that might impact either the need for, or amount of,
any valuation allowance. See "Results of Operations - Income taxes" for
discussion of the Company's analysis of its deferred income tax valuation
allowances.
Pension and OPEB expenses and obligations. The Company's pension and OPEB
expenses and obligations are calculated based on several estimates, including
discount rates, expected rates of returns on plan assets and expected health
care trend rates. The Company reviews these rates annually with the assistance
of its actuaries. See further discussion of the factors considered and potential
effect of these estimates in "Liquidity and Capital Resources - Defined benefit
pension plans" and "Liquidity and Capital Resources - Postretirement benefit
plans other than pensions."
Revenue recognition. Sales revenue is generally recognized when the Company
has certified that its product meets the related customer specifications, the
product has been shipped, and title and substantially all the risks and rewards
of ownership have passed to the customer. Payments received from customers in
advance of these criteria being met are recorded as customer advances until
earned. For inventory consigned to customers, sales revenue is recognized when
(i) the terms of the consignment end, (ii) the Company has completed performance
of all significant obligations and (iii) title and substantially all of the
risks and rewards of ownership have passed to the customer. Amounts charged to
customers for shipping and handling are included in net sales. Sales revenue is
stated net of price and early payment discounts.
Other loss contingencies. Accruals for estimated loss contingencies,
including, but not limited to, product-related liabilities, environmental
remediation and litigation, are recorded when it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated.
Disclosure is made when there is a reasonable possibility that a loss may have
been incurred. Contingent liabilities are often resolved over long time periods.
Estimating probable losses often requires analysis of various projections that
are dependent upon the future outcome of multiple factors, including costs, the
findings of investigations and actions by the Company and third parties.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rates. The Company is exposed to market risk from changes in
interest rates related to indebtedness. The Company typically does not enter
into interest rate swaps or other types of contracts in order to manage its
interest rate market risk. At December 31, 2005, all of the Company's bank
indebtedness was denominated in U.S. dollars or British pounds sterling. At
December 31, 2004, all of the Company's bank indebtedness was denominated in
U.S. dollars. The Company's borrowings accrue interest at variable rates,
generally related to spreads over bank prime rates and LIBOR. Because the
Company's bank indebtedness reprices with changes in market interest rates, the
carrying amount of such debt is believed to approximate fair value. The
following table summarizes the Company's bank variable rate indebtedness and
related maturities as of December 31, 2005:
Contractual maturity date
---------------------------------------------------------------------
There-after Interest
2006 2007 2008 2009 rate (1)
----------- ---------- ----------- ---------- ----------- -----------
(In millions)
U. S. dollars (2) $ - $ - $ - $ - $ 40.3 6.4%
British pounds sterling $ - $ - $ 11.1 $ - $ - 5.6%
(1) Weighted average.
(2) Subsequent to December 31, 2005, the Company entered into a new U.S. credit
facility, which matures in 2010.
The following table summarizes the Company's bank variable rate
indebtedness and related maturities as of December 31, 2004:
Contractual maturity date
---------------------------------------------------------------------
There- Interest
2005 2006 2007 2008 after rate (1)
----------- ---------- ----------- ---------- ----------- -----------
(In millions)
U. S. dollars (1) $ 43.2 $ - $ - $ - $ - 4.3%
(1) Weighted average.
The Subordinated Debentures held by the Capital Trust provide a fixed
6.625% coupon and are exposed to market risk from changing interest rates.
During 2005, the trading volume of the BUCS was minimal and, therefore, the
Company does not believe the last traded value of the BUCS necessarily provides
a fair value of the underlying Subordinated Debentures. The BUCS issued by the
Capital Trust are publicly traded and are convertible, at the option of the
holder, into TIMET common stock at the rate of 2.678 shares of common stock per
BUCS. Based on the last traded value of TIMET common stock ($31.63 per share) on
or before December 31, 2005, the "as converted" value of the 113,467 BUCS
outstanding at December 31, 2005 (which the Company believes provides a
reasonable estimate of fair value of the Subordinated Debentures) was $9.6
million. Based on the last traded value of the BUCS on December 31, 2004 ($16.00
per BUCS), the fair value of the outstanding Subordinated Debentures related to
the 115,717 outstanding BUCS approximated $1.9 million at December 31, 2004.
On March 3, 2005, the Company called all of the outstanding BUCS for
redemption. The redemption price equals 100.6625% of the $50.00 liquidation
amount per BUCS, or $50.3313, plus accrued distributions to the March 24, 2006
redemption date on the BUCS of $0.2116 per BUCS.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of its
international operations. The Company does not enter into currency forward
contracts to manage its foreign exchange market risk associated with
receivables, payables or indebtedness denominated in a currency other than the
functional currency of the particular entity. See "Results of Operations -
European operations" in Item 7 - MD&A for further discussion.
Commodity prices. The Company is exposed to market risk arising from
changes in commodity prices as a result of its long-term purchase and supply
agreements with certain suppliers and customers. These agreements, which offer
various fixed or formula-determined pricing arrangements, effectively obligate
the Company to bear (i) the risk of increased raw material and other costs to
the Company that cannot be passed on to the Company's customers through
increased titanium product prices (in whole or in part) or (ii) the risk of
decreasing raw material costs to the Company's suppliers that are not passed on
to the Company in the form of lower raw material prices. However, the Company's
ability to offset increased material costs with higher selling prices should
increase in 2006, as many of the Company's LTAs have either expired or have been
renegotiated for 2006 with price adjustments that take into account raw material
cost fluctuations.
Securities prices. As of December 31, 2005, the Company holds certain
publicly traded equity securities that are exposed to market risk due to changes
in prices of the securities as reported on the New York Stock Exchange. The
aggregate market value of these equity securities at December 31, 2005 was $46.5
million, as compared to a cost basis of $36.9 million. The potential change in
the aggregate market value of these securities, assuming a 10% change in prices,
would be $4.6 million at December 31, 2005. See also Note 4 to the Consolidated
Financial Statements.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section of
this Annual Report. See Index of Financial Statements and Schedules on page F.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), means controls and other procedures that
are designed to ensure that information required to be disclosed in the reports
that the Company files or submits to the SEC under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits to the
SEC under the Exchange Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of Steven
L. Watson, the Company's Chief Executive Officer, and Bruce P. Inglis, the
Company's Vice President - Finance and Corporate Controller, have evaluated the
Company's disclosure controls and procedures as of December 31, 2005. Based upon
their evaluation, and as a result of the material weaknesses discussed below,
these executive officers have concluded that the Company's disclosure controls
and procedures are not effective as of December 31, 2005.
Scope of management's report on internal control over financial reporting.
The Company also maintains internal control over financial reporting. The term
"internal control over financial reporting," as defined by Rule 13a-15(f) of the
Exchange Act, means a process designed by, or under the supervision of, the
Company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the Company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP, and includes those policies and
procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's Consolidated
Financial Statements.
Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act")
requires the Company to include annually a management report on internal control
over financial reporting and such report is included below. The Company's
independent registered public accounting firm is also required to annually
attest to the Company's internal control over financial reporting.
Management's report on internal control over financial reporting. The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). The Company's evaluation of the effectiveness of its
internal control over financial reporting is based upon the criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO").
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. In connection with management's assessment of the Company's
internal control over financial reporting, management has determined that the
following control deficiencies constitute material weaknesses in the Company's
internal control over financial reporting as of December 31, 2005:
(1) The Company did not maintain a sufficient complement of personnel with
an appropriate level of accounting knowledge, experience and training
commensurate with the Company's financial reporting requirements.
Specifically, the Company did not have accounting and finance
personnel with sufficient depth and skill to allow the Company's
global accounting and financial reporting group to function
effectively. This control deficiency contributed to the second and
third control deficiencies discussed below.
(2) The Company did not maintain effective controls over the accuracy,
authorization and review of recurring and non-recurring manual journal
entries recorded in the general ledger. Specifically, the Company did
not have consistent and comprehensive procedures designed and in place
to ensure that manual journal entries were properly reviewed and
approved to ensure the entries recorded were accurate and valid. This
control deficiency affects substantially all financial statement
accounts. However, this deficiency did not result in an adjustment to
the Company's 2005 consolidated financial statements.
(3) The Company did not maintain effective controls over the
establishment, review and evaluation of the adequacy of its accounting
policies and procedures. Specifically, the Company did not (a) have
sufficient written policies and procedures insofar as they relate to
the appropriate application of GAAP relating to revenue recognition
and inventory, (b) consistently apply existing written policies and
procedures throughout the Company or (c) update and communicate its
accounting policies and procedures in a timely manner to reflect
changes in the Company's business. This control deficiency primarily
affected the Company's accounting for revenue recognition and several
components of inventory, including accounting for production variances
and obsolescence reserves. This control deficiency resulted in certain
adjustments, including audit adjustments that were recorded in the
2005 third quarter consolidated financial statements and the 2005
annual consolidated financial statements.
Each of the control deficiencies described in (1) through (3) above could
result in a misstatement of the Company's account balances or disclosures that
would result in a material misstatement to the Company's annual or interim
consolidated financial statements that would not be prevented or detected.
Management determined that each of these control deficiencies discussed in
(1) through (3) above constitutes a material weakness.
As a result of the material weaknesses described above, management of the
Company has concluded that the Company did not maintain effective internal
control over financial reporting as of December 31, 2005, based on the criteria
in the COSO framework.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included in this Annual Report on Form 10-K.
Remediation of material weaknesses. In response to the identified material
weaknesses, management of the Company intends to take the following actions
during 2006:
(1) The Company intends to increase its global accounting and finance
staff in order to have sufficient resources to meet the Company's
rapidly growing needs. The Company currently expects to hire the
additional personnel in 2006. This remediation will also be a
significant component of the remediation of the second and third
material weaknesses described above.
(2) The Company intends to modify and expand the functionality of its
computer system (an "IT solution"), where possible, to ensure evidence
is available to verify that personnel with the appropriate level of
authority have reviewed and approved manual journal entries prior to
the entries being recorded in the Company's general ledger.
Additionally, the Company will continue to maintain evidence
supporting the sufficiency of the manual journal entries in
conjunction with the IT solution. For any location where an IT
solution is not readily available, additional reviews will be required
by personnel independent of those personnel recording the manual
journal entries. The Company currently expects to complete the
modification and expansion of the functionality of its computer system
in 2006, to implement alternate controls until such functionality is
in place and otherwise to complete the remediation of this control
deficiency in 2006.
(3) The Company intends to (a) prepare and distribute written policies and
procedures covering all significant accounting processes for which
such procedures do not already exist, (b) implement additional
training and review processes to ensure all accounting procedures are
implemented and applied properly and timely on a consistent basis
throughout the Company and (c) implement guidelines surrounding the
contemporaneous review and updating of all significant accounting
procedures when business conditions so indicate. Although the control
deficiency as of December 31, 2005 only related to certain financial
statement accounts, this remediation plan will apply to all
significant financial statement accounts. The Company has already
updated certain of its key accounting procedures, and it will
prioritize the preparation and distribution of additional procedures
and related training based on the Company's risk assessment of the
areas that are the most important.
Changes in internal control over financial reporting. There have been no
changes to the Company's internal control over financial reporting during the
quarter ended December 31, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Certifications. The Company's chief executive officer is required to
annually file a certification with the New York Stock Exchange ("NYSE"),
certifying the Company's compliance with the corporate governance listing
standards of the NYSE. During 2005, the Company's chief executive officer filed
such annual certification with the NYSE, which was not qualified in any respect,
indicating that he was not aware of any violations by the Company of the NYSE
corporate governance listing standards. The Company's principal executive
officer and principal financial officer are also required to, among other
things, file quarterly certifications with the SEC regarding the quality of the
Company's public disclosures, as required by Section 302 of the Sarbanes-Oxley
Act. Such certifications for the year ended December 31, 2005 have been filed as
exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.
ITEM 9B: OTHER INFORMATION
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
TIMET's definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
Annual Report (the "TIMET Proxy Statement").
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement. See also Note 18 to the Consolidated Financial
Statements.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (c) Financial Statements and Schedules
The Consolidated Financial Statements and schedules listed by the
Registrant on the accompanying Index of Financial Statements and Schedules (see
page F) are filed as part of this Annual Report.
(b) Exhibits
The Exhibit Index lists all items included as exhibits to this Annual
Report. TIMET will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to TIMET of furnishing the
exhibits. Instruments defining the rights of holders of long-term debt issues
which do not exceed 10% of consolidated total assets will be furnished to the
SEC upon request.
Item No. Exhibit Index
-------------- ------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Titanium
Metals Corporation, as amended effective February 14, 2003,
incorporated by reference to Exhibit 3.1 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2003.
3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Titanium Metals Corporation, effective August 5,
2004, incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004.
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Titanium Metals Corporation, effective February
15, 2006, incorporated by reference to Exhibit 99.1 the
Registrant's Current Report on Form 8-K filed with the SEC on
February 15, 2006.
3.4 Bylaws of Titanium Metals Corporation as Amended and Restated,
dated December 21, 2005, incorporated by reference to Exhibit
3(c) to the Registrant's Current Report on Form 8-K filed with
the SEC on December 21, 2006.
4.1 Certificate of Trust of TIMET Capital Trust I, dated November 13,
1996, incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K filed with the SEC on
December 5, 1996.
4.2 Amended and Restated Declaration of Trust of TIMET Capital Trust
I, dated as of November 20, 1996, among Titanium Metals
Corporation, as Sponsor, the Chase Manhattan Bank, as Property
Trustee, Chase Manhattan Bank (Delaware), as Delaware Trustee and
Joseph S. Compofelice, Robert E. Musgraves and Mark A. Wallace,
as Regular Trustees, incorporated by reference to Exhibit 4.2 to
the Registrant's Current Report on Form 8-K filed with the SEC on
December 5, 1996.
Item No. Exhibit Index
-------------- -------------------------------------------------------------
4.3 Indenture for the 6 5/8% Convertible Junior Subordinated
Debentures, dated as of November 20, 1996, among Titanium Metals
Corporation and The Chase Manhattan Bank, as Trustee,
incorporated by reference to Exhibit 4.3 to the Registrant's
Current Report on Form 8-K filed with the SEC on December 5,
1996.
4.4 Form of 6 5/8% Convertible Preferred Securities (included in
Exhibit 4.2 above), incorporated by reference to Exhibit 4.4 to
the Registrant's Current Report on Form 8-K filed with the SEC on
December 5, 1996.
4.5 Form of 6 5/8% Convertible Junior Subordinated Debentures
(included in Exhibit 4.3 above), incorporated by reference to
Exhibit 4.6 to the Registrant's Current Report on Form 8-K filed
with the SEC on December 5, 1996.
4.6 Form of 6 5/8% Trust Common Securities (included in Exhibit 4.2
above), incorporated by reference to Exhibit 4.5 to the
Registrant's Current Report on Form 8-K filed with the SEC on
December 5, 1996.
4.7 Convertible Preferred Securities Guarantee, dated as of November
20, 1996, between Titanium Metals Corporation, as Guarantor, and
The Chase Manhattan Bank, as Guarantee Trustee, incorporated by
reference to Exhibit 4.7 to the Registrant's Current Report on
Form 8-K filed with the SEC on December 5, 1996.
4.8 Purchase Agreement, dated November 20, 1996, between Titanium
Metals Corporation, TIMET Capital Trust I, Salomon Brothers Inc,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan
Stanley & Co. Incorporated, as Initial Purchasers, incorporated
by reference to Exhibit 99.1 to the Registrant's Current Report
on Form 8-K filed with the SEC on December 5, 1996.
4.9 Registration Agreement, dated November 20, 1996, between TIMET
Capital Trust I and Salomon Brothers Inc, as Representative of
the Initial Purchasers, incorporated by reference to Exhibit 99.2
to the Registrant's Current Report on Form 8-K filed with the SEC
on December 5, 1996.
4.10 Form of Certificate of Designations, Rights and Preferences of 6
3/4 % Series A Convertible Preferred Stock, incorporated by
reference to Exhibit 4.1 to the Registrant's Pre-effective
Amendment No. 1 to Registration Statement on Form S-4 (File No.
333-114218).
9.1 Shareholders' Agreement, dated February 15, 1996, among Titanium
Metals Corporation, Tremont Corporation, IMI plc, IMI Kynoch
Ltd., and IMI Americas, Inc., incorporated by reference to
Exhibit 2.2 to Tremont Corporation's Current Report on Form 8-K
filed with the SEC on March 1, 1996.
9.2 Amendment to Shareholders' Agreement, dated March 29, 1996, among
Titanium Metals Corporation, Tremont Corporation, IMI plc, IMI
Kynoch Ltd., and IMI Americas, Inc., incorporated by reference to
Exhibit 10.30 to Tremont Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995.
Item No. Exhibit Index
-------------- --------------------------------------------------------------
9.3 Voting Agreement executed October 5, 2004 but effective as of
October 1, 2004 among NL Industries, Inc., TIMET Finance
Management Company and CompX Group, Inc., incorporated by
reference to Exhibit 99.2 to the Current Report on Form 8-K of NL
Industries, Inc. filed with the SEC on October 8, 2004.
10.1 Form of Lease Agreement, dated November 12, 2004, between The
Prudential Assurance Company Limited. and TIMET UK Ltd. related
to the premises known as TIMET Number 2 Plant, The Hub,
Birmingham, England, incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 8-K filed with the SEC on
November 17, 2004
10.2 Loan and Security Agreement by and among Congress Financial
Corporation (Southwest) as Lender and Titanium Metals Corporation
and Titanium Hearth Technologies, Inc. as borrowers, dated
February 25, 2000, incorporated by reference to Exhibit 10.12 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.3 Amendment No. 1 to Loan and Security Agreement by and among
Congress Financial Corporation (Southwest) as Lender and Titanium
Metals Corporation and Titanium Hearth Technologies, Inc. as
borrowers, dated September 7, 2001, incorporated by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001.
10.4 Amendment No. 2 to Loan and Security Agreement by and among
Congress Financial Corporation (Southwest) as Lender and Titanium
Metals Corporation and Titanium Hearth Technologies, Inc. as
borrowers, dated October 23, 2002, incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002.
10.5 Amendment No. 3 to Loan and Security Agreement by and among
Congress Financial Corporation (Southwest) as Lender and Titanium
Metals Corporation and Titanium Hearth Technologies, Inc. as
borrowers, dated March 18, 2004, and effective February 12, 2004,
incorporated by reference to Exhibit 6 to Amendment No. 4 to the
statement on Schedule 13D for CompX International, Inc. filed by
Valhi, Inc. (along with other reporting persons) on March 23,
2004 (File No. 005-54653).
10.6 Amendment No. 4 to Loan and Security Agreement by and among
Congress Financial Corporation (Southwest) as Lender and Titanium
Metals Corporation and Titanium Hearth Technologies, Inc. as
borrowers, dated June 2, 2004, incorporated by reference to
Exhibit 10.1 to the Registrant's Pre-effective Amendment No.1 to
Registration Statement on Form S-4 (File No. 333-114218).
10.7 Amendment No. 5 to Loan and Security Agreement by and among
Wachovia Bank, National Association, successor by merger to
Congress Financial Corporation (Southwest) as Lender and Titanium
Metals Corporation and Titanium Hearth Technologies, Inc. as
borrowers, dated June 30, 2005, incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005.
Item No. Exhibit Index
-------------- --------------------------------------------------------------
10.8 Credit Agreement among U.S. Bank National Association, Comerica
Bank, Harris N.A., JP Morgan Chase Bank, N.A., The CIT
Group/Business Credit, Inc., and Wachovia Bank, National
Association as lenders and Titanium Metals Corporation as
Borrower and U.S. Bank National Association, as Agent, dated
February 17, 2006, incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 8-K filed with the SEC on
February 23, 2006.
10.9 Loan and Overdraft Facilities between Lloyds TSB Bank plc and
TIMET UK Limited dated December 20, 2002, incorporated by
reference to Exhibit 10.23 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2002.
10.10 Letter dated December 19, 2003 to extend Loan and Overdraft
Facilities between Lloyds TSB Bank plc and TIMET UK Limited dated
December 20, 2002, incorporated by reference to Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2004.
10.11 Letter dated November 22, 2004 to extend Loan and Overdraft
Facilities between Lloyds TSB Bank plc and TIMET UK Limited dated
December 20, 2002, incorporated by reference to Exhibit 10.9 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2004.
10.12 January 19, 2005 Variation Letter to Loan and Overdraft
Facilities between Lloyds TSB Bank plc and TIMET UK Limited dated
December 20, 2002, incorporated by reference to Exhibit 10.10 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2004.
10.13 Letter dated March 2, 2005 to amend Loan and Overdraft Facilities
between Lloyds TSB Bank plc and TIMET UK Limited dated December
20, 2002, incorporated by reference to Exhibit 10.1 to the
Registrant's quarterly Report on Form 10-Q for the quarter ended
March 31, 2005.
10.14 Bank of Scotland Working Capital Facility of (pound)
22,500,000/Payment Systems, incorporated by reference to exhibit
10.1 to the Registrant's Current Report on Form 8-K filed with
the SEC on May 27, 2005.
10.15* 1996 Long Term Performance Incentive Plan of Titanium Metals
Corporation, incorporated by reference to Exhibit 10.19 to the
Registrant's Amendment No. 1 to Registration Statement on Form
S-1 (File No. 333-18829).
10.16* 2005 Titanium Metals Corporation Profit Sharing Plan (Amended and
Restated as of April 6, 2005), incorporated by reference to
Appendix A to the Registrant's Proxy Statement dated April 8,
2005 filed with the SEC on April 11, 2005.
10.17* Executive Severance Policy, as amended and restated effective May
17, 2000, incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000.
Item No. Exhibit Index
-------------- ---------------------------------------------------------------
10.18* Titanium Metals Corporation Amended and Restated 1996
Non-Employee Director Compensation Plan, as amended and restated
effective November 15, 2005, incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K/A filed with
the SEC on March 2, 2006.
10.19* Amendment to Employment Contract between TIMET Savoie, S.A.,
Christian Leonhard and Titanium Metals Corporation, executed as
of November 25, 2003, incorporated by reference to Exhibit 10.12
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.20* 2005 Amendment to Employment Contract between TIMET Savoie, S.A.,
Christian J.M. Leonhard and Titanium Metals Corporation, executed
as of November 25, 2003.
10.21 Settlement Agreement and Release of Claims dated April 19, 2001
between Titanium Metals Corporation and The Boeing Company,
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2001.
10.22 Intercorporate Services Agreement among Contran Corporation,
Tremont LLC and Titanium Metals Corporation, effective as of
January 1, 2004, incorporated by reference to Exhibit 10.17 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.23** Purchase and Sale Agreement (For Titanium Products) between The
Boeing Company, acting through its division, Boeing Commercial
Airplanes, and Titanium Metals Corporation (as amended and
restated effective April 19, 2001), incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002.
10.24** General Terms Agreement between The Boeing Company and Titanium
Metals Corporation, incorporated by reference to Exhibit 10.2 to
the Registrant's Current Report on Form 8-K/A filed with the SEC
on November 16, 2005.
10.25** Special Business Provisions between The Boeing Company and
Titanium Metals Corporation, incorporated by reference to Exhibit
10.3 to the Registrant's Current Report on Form 8-K/A filed with
the SEC on November 16, 2005.
10.26** Purchase and Sale Agreement between Rolls-Royce plc and Titanium
Metals Corporation dated December 22, 1998, incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002.
10.27** First Amendment to Purchase and Sale Agreement between
Rolls-Royce plc and Titanium Metals Corporation, incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004.
10.28** Second Amendment to Purchase and Sale Agreement between
Rolls-Royce plc and Titanium Metals Corporation, incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004.
Item No. Exhibit Index
-------------- -------------------------------------------------------------
10.29 Agreement Regarding Shared Insurance by and between CompX
International Inc., Contran Corporation, Keystone Consolidated
Industries, Inc., Kronos Worldwide, Inc., NL Industries, Inc.,
Titanium Metals Corporation and Valhi, Inc. dated October 30,
2003, incorporated by reference to Exhibit 10.20 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.30 Subscription Agreement executed October 5, 2004 but effective as
of October 1, 2004 among NL Industries, Inc., TIMET Finance
Management Company and CompX Group, Inc., incorporated by
reference to Exhibit 99.1 to the Current Report on Form 8-K of NL
Industries, Inc. filed with the SEC on October 8, 2004.
10.31 Certificate of Incorporation of CompX Group, Inc., incorporated
by reference to Exhibit 99.3 to the Current Report on Form 8-K of
NL Industries, Inc. filed with the SEC on October 8, 2004.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* Management contract, compensatory plan or arrangement.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TITANIUM METALS CORPORATION
(Registrant)
By /s/ Steven L. Watson
----------------------------------
Steven L. Watson, March 24, 2006
Vice Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ Harold C. Simmons /s/ Glenn R. Simmons
----------------------------------------------------- ------------------------------------------
Harold C. Simmons, March 24, 2006 Glenn R. Simmons, March 24, 2006
Chairman of the Board Director
/s/ Steven L. Watson /s/ Thomas P. Stafford
----------------------------------------------------- ------------------------------------------
Steven L. Watson, March 24, 2006 Thomas P. Stafford, March 24, 2006
Vice Chairman of the Board and Director
Chief Executive Officer
/s/ Norman N. Green /s/ Paul J. Zucconi
----------------------------------------------------- -------------------------------------------
Norman N. Green, March 24, 2006 Paul J. Zucconi, March 24, 2006
Director Director
/s/ Gary C. Hutchison /s/ Bruce P. Inglis
----------------------------------------------------- -------------------------------------------
Gary C. Hutchison, March 24, 2006 Bruce P. Inglis, March 24, 2006
Director Vice President - Finance and Corporate
Controller
Principal Financial Officer
/s/ Albert W. Niemi, Jr. Principal Accounting Officer
-----------------------------------------------------
Albert W. Niemi, Jr., March 24, 2006
Director
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 15(a) and 15(c)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
Financial Statements
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets - December 31, 2005;
December 31, 2004 (Restated) F-4
Consolidated Statements of Operations -
Years ended December 31, 2005; Years ended
December 31, 2004 and 2003 (Restated) F-6
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2005; Years ended
December 31, 2004 and 2003 (Restated) F-8
Consolidated Statements of Cash Flows -
Years ended December 31, 2005; Years ended
December 31, 2004 and 2003 (Restated) F-9
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2005; Years ended
December, 2004 and 2003 (Restated) F-11
Notes to Consolidated Financial Statements F-12
Financial Statement Schedules
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Titanium Metals Corporation:
We have completed integrated audits of Titanium Metals Corporation's 2005
and 2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2005 and an audit of its 2003
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of comprehensive income (loss),
of changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Titanium Metals Corporation and its
subsidiaries at December 31, 2005 and 2004, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2005 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Effective January 1, 2005, the Company changed its method of accounting for
part of its inventory from the LIFO method to the specific identification method
and has restated prior period financial statements. See Note 2 to the
consolidated financial statements. Effective January 1, 2003, the Company
changed its method of accounting for asset retirement obligations. See Note 2 to
the consolidated financial statements.
Internal control over financial reporting
Also, we have audited management's assessment, included in Management's
Report on Internal Control over Financial Reporting appearing under Item 9A,
that the Company did not maintain effective internal control over financial
reporting as of December 31, 2005 because the Company did not maintain (i) a
sufficient complement of personnel with an appropriate level of accounting
knowledge, experience and training commensurate with the Company's financial
reporting requirements, (ii) effective controls over the accuracy, authorization
and review of recurring and non-recurring manual journal entries recorded in the
general ledger and (iii) effective controls over the establishment, review and
evaluation of the adequacy of its accounting policies and procedures, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment as of December 31, 2005:
(1) The Company did not maintain a sufficient complement of personnel with
an appropriate level of accounting knowledge, experience and training
commensurate with the Company's financial reporting requirements.
Specifically, the Company did not have accounting and finance
personnel with sufficient depth and skill to allow the Company's
global accounting and financial reporting group to function
effectively. This control deficiency contributed to the second and
third control deficiencies discussed below.
(2) The Company did not maintain effective controls over the accuracy,
authorization and review of recurring and non-recurring manual journal
entries recorded in the general ledger. Specifically, the Company did
not have consistent and comprehensive procedures designed and in place
to ensure that manual journal entries were properly reviewed and
approved to ensure the entries recorded were accurate and valid. This
control deficiency affects substantially all financial statement
accounts. However, this deficiency did not result in an adjustment to
the Company's 2005 consolidated financial statements.
(3) The Company did not maintain effective controls over the
establishment, review and evaluation of the adequacy of its accounting
policies and procedures. Specifically, the Company did not (a) have
sufficient written policies and procedures insofar as they relate to
the appropriate application of generally accepted accounting
principles relating to revenue recognition and inventory, (b)
consistently apply existing written policies and procedures throughout
the Company or (c) update and communicate its accounting policies and
procedures in a timely manner to reflect changes in the Company's
business. This control deficiency primarily affected the Company's
accounting for revenue recognition and several components of
inventory, including accounting for production variances and
obsolescence reserves. This control deficiency resulted in certain
adjustments, including audit adjustments that were recorded in the
2005 third quarter consolidated financial statements and the 2005
annual consolidated financial statements.
Each of these control deficiencies described in (1) through (3) above could
result in a misstatement of the Company's account balances or disclosures that
would result in a material misstatement to the Company's annual or interim
consolidated financial statements that would not be prevented or detected.
The Company determined that each of these control deficiencies discussed in
(1) through (3) above constitute material weaknesses.
These material weaknesses were considered in determining the nature, timing
and extent of audit tests applied in our audit of the 2005 consolidated
financial statements, and our opinion regarding the effectiveness of the
Company's internal control over financial reporting does not affect our opinion
on those consolidated financial statements.
In our opinion, management's assessment that Titanium Metals Corporation
did not maintain effective internal control over financial reporting as of
December 31, 2005 is fairly stated, in all material respects, based on criteria
established in Internal Control - Integrated Framework issued by the COSO. Also,
in our opinion, because of the effect of the material weaknesses described above
on the achievement of the objectives of the control criteria, the Company did
not maintain effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the COSO.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
March 24, 2006
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
-----------------------------------
ASSETS 2005 2004
---------------- ----------------
(restated)
Current assets:
Cash and cash equivalents $ 17,605 $ 7,194
Restricted cash and cash equivalents 146 721
Accounts and other receivables, less
allowance of $1,983 and $1,683 142,902 96,756
Inventories, net 365,696 266,634
Prepaid expenses and other 4,485 2,400
Deferred income taxes 19,436 4,974
---------------- ----------------
Total current assets 550,270 378,679
Marketable securities 46,477 47,214
Investment in joint ventures 25,978 22,591
Investment in common securities of TIMET Capital Trust I 180 6,259
Property and equipment, net 252,990 228,173
Intangible assets, net 683 5,057
Deferred income taxes 8,009 1,053
Other 22,677 11,577
---------------- ----------------
Total assets $ 907,264 $ 700,603
================ ================
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
December 31,
-----------------------------------
LIABILITIES, MINORITY INTEREST AND 2005 2004
---------------- ----------------
STOCKHOLDERS' EQUITY (restated)
Current liabilities:
Notes payable $ - $ 43,176
Accounts payable 61,457 44,164
Accrued liabilities 75,698 61,440
Deferred gain on sale of property - 12,016
Customer advances 15,577 6,913
Income taxes payable 13,151 2,516
Other 967 257
---------------- ----------------
Total current liabilities 166,850 170,482
Long-term debt 51,359 -
Accrued OPEB cost 15,580 14,470
Accrued pension cost 58,450 77,515
Accrued environmental cost 1,518 1,985
Deferred income taxes 27,445 60
Debt payable to TIMET Capital Trust I 5,852 12,010
Other 4,519 5,114
---------------- ----------------
Total liabilities 331,573 281,636
---------------- ----------------
Minority interest 13,523 12,539
---------------- ----------------
Stockholders' equity:
Series A Preferred Stock, $.01 par value; $149,131 liquidation preference;
3,098 and 4,025 shares authorized, respectively, 2,983 and
3,909 shares issued and outstanding, respectively 132,493 173,650
Common stock, $.01 par value; 90,000 shares authorized,
70,965 and 63,853 shares issued, respectively 710 637
Additional paid-in capital 401,057 350,389
Accumulated earnings (deficit) 66,179 (77,044)
Accumulated other comprehensive loss (38,271) (39,989)
Treasury stock, at cost (0 and 180 shares, respectively) - (1,208)
Deferred compensation - (7)
---------------- ----------------
Total stockholders' equity 562,168 406,428
---------------- ----------------
Total liabilities, minority interest and stockholders' equity $ 907,264 $ 700,603
================ ================
Commitments and contingencies (Note 19)
See accompanying notes to consolidated financial statements.
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year ended December 31,
---------------------------------------------------
2005 2004 2003
---------------- -------------- -------------
(restated) (restated)
Net sales $ 749,777 $ 501,828 $ 385,304
Cost of sales 550,415 438,151 379,660
---------------- -------------- -------------
Gross margin 199,362 63,677 5,644
Selling, general, administrative and
development expense 53,646 44,908 36,438
Equity in earnings of joint ventures 5,059 1,278 451
Other income (expense), net 20,300 22,989 24,389
---------------- -------------- -------------
Operating income (loss) 171,075 43,036 (5,954)
Interest expense 3,963 12,451 16,419
Other non-operating income (expense), net 18,228 16,200 (294)
---------------- -------------- -------------
Income (loss) before income taxes, minority
interest and cumulative effect of change in
accounting principle 185,340 46,785 (22,667)
Income tax expense (benefit) 24,496 (2,132) 1,207
Minority interest, net of tax 4,899 1,219 378
---------------- -------------- -------------
Income (loss) before cumulative effect of change
in accounting principle 155,945 47,698 (24,252)
Cumulative effect of change in accounting principle - - (191)
---------------- -------------- -------------
Net income (loss) 155,945 47,698 (24,443)
Dividends on Series A Preferred Stock 12,244 4,398 -
---------------- -------------- -------------
Net income (loss) attributable to
common stockholders $ 143,701 $ 43,300 $ (24,443)
================ ============== =============
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Year ended December 31,
------------------------------------------------------
2005 2004 2003
--------------- ---------------- ---------------
(restated) (restated)
Basic earnings (loss) per share attributable to common stockholders:
Before cumulative effect of change
in accounting principle $ 2.20 $ 0.68 $ (0.38)
Cumulative effect of change in accounting
principle - - (0.01)
--------------- ---------------- ---------------
Basic earnings (loss) per share attributable to common
stockholders $ 2.20 $ 0.68 $ (0.39)
=============== ================ ===============
Diluted earnings (loss) per share attributable to common stockholders:
Before cumulative effect of change
in accounting principle $ 1.72 $ 0.66 $ (0.38)
Cumulative effect of change in accounting
principle - - (0.01)
--------------- ---------------- ---------------
Diluted earnings (loss) per share attributable to common
stockholders $ 1.72 $ 0.66 $ (0.39)
=============== ================ ===============
Weighted average shares outstanding:
Basic 65,391 63,525 63,374
=============== ================ ===============
Diluted 90,856 72,502 63,374
=============== ================ ===============
See accompanying notes to consolidated financial statements.
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year ended December 31,
----------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
(restated) (restated)
Net income (loss) $ 155,945 $ 47,698 $ (24,443)
Other comprehensive income (loss):
Currency translation adjustment, net of tax (11,880) 6,435 11,443
Unrealized (losses) gains on marketable
securities, net of tax (3,017) 12,597 -
TIMET's share of VALTIMET SAS's unrealized net
gains on derivative financial instruments
qualifying as cash flow hedges, net of tax (618) 97 -
Pension liabilities adjustment , net of tax 17,233 (8,892) 1,068
--------------- --------------- ---------------
Total other comprehensive income 1,718 10,237 12,511
--------------- --------------- ---------------
Comprehensive income (loss) $ 157,663 $ 57,935 $ (11,932)
=============== =============== ===============
Currency translation adjustment:
Beginning of year $ 16,842 $ 10,407 $ (1,036)
Change during year (11,880) 6,435 11,443
--------------- --------------- ---------------
End of year $ 4,962 $ 16,842 $ 10,407
=============== =============== ===============
Unrealized (losses) gains on marketable securities:
Beginning of year $ 12,597 $ - $ -
Change during year (3,017) 12,597 -
--------------- --------------- ---------------
End of year $ 9,580 $ 12,597 $ -
=============== =============== ===============
TIMET's share of VALTIMET SAS's unrealized net gains on derivative financial
instruments qualifying as cash flow hedges:
Beginning of year $ 97 $ - $ -
Change during year (618) 97 -
--------------- --------------- ---------------
End of year $ (521) $ 97 $ -
=============== =============== ===============
Pension liabilities adjustment:
Beginning of year $ (69,525) $ (60,633) $ (61,701)
Change during year 17,233 (8,892) 1,068
--------------- --------------- ---------------
End of year $ (52,292) $ (69,525) $ (60,663)
=============== =============== ===============
See accompanying notes to consolidated financial statements.
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
--------------------------------------------------
2005 2004 2003
--------------- -------------- --------------
Cash flows from operating activities: (restated) (restated)
Net income (loss) $ 155,945 $ 47,698 $ (24,443)
Depreciation and amortization 31,532 32,828 36,572
Noncash impairment of equipment 1,251 - -
(Gain) loss on disposal of fixed assets (13,408) 37 655
Gain on exchange of BUCS - (15,465) -
Equity in earnings of joint ventures,
net of distributions (5,009) 527 796
Equity in earnings of common securities of
TIMET Capital Trust I, net of distributions 33 536 (432)
Deferred income taxes 2,131 (5,711) (259)
Minority interest, net of tax 4,899 1,219 378
Other, net (50) (73) 616
Change in assets and liabilities:
Receivables (52,599) (25,587) 4,798
Inventories (108,845) (68,533) 31,983
Prepaid expenses and other (668) (77) 461
Accounts payable and accrued liabilities 30,912 20,037 (1,029)
Customer advances 9,186 3,316 (207)
Income taxes 14,396 4,417 (256)
Deferred revenue 4,534 (84) 3,865
Accrued OPEB and pension costs 652 2,927 (2,007)
Accrued interest on debt payable to
TIMET Capital Trust I (33) (18,936) 14,403
Other, net (1,963) (1,509) (73)
--------------- -------------- --------------
Net cash provided (used) by operating activities 72,896 (22,433) 65,821
--------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures (61,128) (23,556) (12,467)
Purchase of marketable securities (2,223) (34,472) -
Proceeds from sale of property 1,289 11,973 -
Change in restricted cash, net 576 1,527 (2,102)
Other, net - - 35
--------------- -------------- --------------
Net cash used by investing activities (61,486) (44,528) (14,534)
--------------- -------------- --------------
Cash flows from financing activities:
Indebtedness:
Borrowings 373,369 160,195 127,253
Repayments (365,098) (117,019) (146,322)
Dividends paid to minority interest (2,216) (691) (1,892)
Dividends paid on Series A Preferred Stock (12,506) (3,298) -
Issuance of common stock 6,443 75 -
Other, net (20) (520) (1,107)
--------------- -------------- --------------
Net cash (used) provided by financing activities (28) 38,742 (22,068)
--------------- -------------- --------------
Net cash provided (used) by operating, investing
and financing activities $ 11,382 $ (28,219) $ 29,219
=============== ============== ==============
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Year ended December 31,
-------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
(restated) (restated)
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ 11,382 $ (28,219) $ 29,219
Effect of exchange rate changes on cash (971) 373 (393)
-------------- -------------- --------------
10,411 (27,846) 28,826
Cash and cash equivalents at beginning of year 7,194 35,040 6,214
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 17,605 $ 7,194 $ 35,040
============== ============== ==============
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 3,392 $ 30,624 $ 1,325
Income taxes, net $ 7,880 $ - $ 1,561
See accompanying notes to consolidated financial statements.
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2005, 2004 and 2003
(In thousands)
Series A Additional Retained
Common Common Preferred Paid-in Earnings
Shares Stock Stock Capital (Deficit)
---------- ---------- ------------ ------------- ------------
(restated)
Balance at December 31, 2002 63,701 $ 637 $ - $ 350,285 $ (97,000)
Comprehensive income (loss) - - - - (24,443)
Issuance of common stock 60 - - 71 -
Stock award cancellations (146) (1) - (317) -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - -
---------- ---------- ------------ ------------- ------------
Balance at December 31, 2003 63,615 636 - 350,039 (121,443)
Comprehensive income - - - - 47,698
Issuance of Preferred Stock ("PS") - - 173,650 - -
Dividends declared on PS - - - - (3,299)
Issuance of common stock 97 1 - 421 -
Stock award cancellations (39) - - (71) -
Amortization of deferred
compensation, net - - - - -
---------- ---------- ------------ ------------- ------------
Balance at December 31, 2004 63,673 637 173,650 350,389 (77,044)
Comprehensive income - - - - 155,945
Issuance of common stock 1,110 12 - 6,571 -
Conversion of PS and BUCS 6,182 63 (41,157) 41,208 -
Treasury stock retirement - (2) - (990) (216)
Tax benefit of stock options
exercised and restricted
stock vested - - - 3,879 -
Dividends declared on PS - - - - (12,506)
Amortization of deferred
compensation, net - - - - -
---------- ---------- ------------- ------------- ------------
Balance at December 31, 2005 70,965 $ 710 $ 132,493 $ 401,057 $ 66,179
========== ========== ============= ============= ============
See accompanying notes to consolidated financial statements.
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONT'D)
Years ended December 31, 2005, 2004 and 2003
(In thousands)
Accumulated
Other
Comprehensive Treasury Deferred
Income (Loss) Stock Compensation Total
--------------- ---------- -------------- ------------
(restated)
Balance at December 31, 2002 $ (62,737) $ (1,208) $ (255) $ 189,722
Comprehensive income (loss) 12,511 - - (11,932)
Issuance of common stock - - - 71
Stock award cancellations - - 318 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - (119) (119)
--------------- ---------- -------------- ------------
Balance at December 31, 2003 (50,226) (1,208) (56) 177,742
Comprehensive income 10,237 - - 57,935
Issuance of Preferred Stock ("PS") - - - 173,650
Dividends declared on PS - - - (3,299)
Issuance of common stock - - - 422
Stock award cancellations - - 71 -
Amortization of deferred
compensation, net - - (22) (22)
--------------- ---------- -------------- ------------
Balance at December 31, 2004 (39,989) (1,208) (7) 406,428
Comprehensive income 1,718 - - 157,663
Issuance of common stock - - - 6,583
Conversion of PS and BUCS - - - 114
Treasury stock retirement - 1,208 - -
Tax benefit of stock options
exercised and restricted
stock vested - - - 3,879
Dividends declared on PS - - - (12,506)
Amortization of deferred
compensation, net - - 7 7
--------------- ---------- -------------- ------------
Balance at December 31, 2005 $ (38,271) $ - $ - $ 562,168
=============== ========== ============== ============
See accompanying notes to consolidated financial statements.
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. The accompanying Consolidated
Financial Statements include the accounts of TIMET and all of its majority-owned
subsidiaries (collectively, the "Company") except the TIMET Capital Trust I (the
"Capital Trust"), a wholly-owned finance subsidiary. See further discussion in
Note 12. All material intercompany transactions and balances with consolidated
subsidiaries have been eliminated, and certain prior year amounts have been
reclassified to conform to the current year presentation.
At December 31, 2005, Valhi, Inc. and subsidiaries ("Valhi") held 39.5% of
TIMET's outstanding common stock and 0.5% of the Company's 6.75% Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). At December 31,
2004, Contran Corporation ("Contran") held, directly or through subsidiaries,
92% of Valhi's outstanding common stock. At December 31, 2005, the Combined
Master Retirement Trust ("CMRT"), a trust sponsored by Contran to permit the
collective investment by trusts that maintain the assets of certain employee
benefit plans adopted by Contran and certain related companies, held 10.8% of
the Company's common stock. TIMET's U.S. pension plans invest in the portion of
the CMRT that does not hold TIMET common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee, or is held by Mr. Simmons or persons or other entities related to
Mr. Simmons. In addition, Mr. Simmons is the sole trustee of the CMRT and a
member of the trust investment committee for the CMRT. At December 31, 2005, Mr.
Simmons directly owned 2.0% of TIMET's outstanding common stock and Mr. Simmons'
spouse owned 0.3% of TIMET's outstanding common stock and 53.6% of the Company's
outstanding Series A Preferred Stock. Consequently, Mr. Simmons may be deemed to
control each of Contran, Valhi and TIMET. Subsequent to December 31, 2005 and
through March 10, 2006, Mr. Simmons purchased an additional 527,700 shares of
TIMET common stock in open market transactions.
The Company completed a two-for-one split of its common stock, which was
effected in the form of a stock dividend (whereby an additional one share of
post-split stock was distributed for each share of pre-split stock) and became
effective after the close of trading on February 16, 2006. The Company also
completed a two-for-one split of its common stock effective after the close of
trading on September 6, 2005 and a five-for-one stock split of its common stock
effective after the close of trading on August 26, 2004. The Company completed a
one-for-ten reverse stock split which became effective after the close of
trading on February 14, 2003. All share and per share disclosures for all
periods presented have been adjusted to give effect to all of these stock
splits.
Note 2 - Summary of significant accounting policies
Use of estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amount of
revenues and expenses during the reporting period. Estimates are used in
accounting for, among other things, allowances for uncollectible accounts,
inventory allowances, environmental accruals, self insurance accruals, deferred
tax valuation allowances, loss contingencies, fair values of financial
instruments, the determination of discount and other rate assumptions for
pension and postretirement employee benefit costs, asset impairments, useful
lives of property and equipment, asset retirement obligations, restructuring
accruals and other special items. Actual results may, in some instances, differ
from previously estimated amounts. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the period they are
determined to be necessary.
Cash and cash equivalents. Cash equivalents include highly liquid
investments with original maturities of three months or less.
Restricted cash and cash equivalents. Restricted cash and cash equivalents
generally consist of certificates of deposit and other interest bearing accounts
collateralizing certain Company obligations. Such restricted amounts are
generally classified as either a current or noncurrent asset depending on the
classification of the obligation to which the restricted amount relates. All
restricted amounts are classified as current at December 31, 2005 and 2004.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Inventories and cost of sales; restatement for change in accounting
principle. Inventories include material, labor and overhead and are stated at
the lower of cost or market, net of an allowance for slow-moving inventories of
$13.2 million at December 31, 2005 and $17.0 million at December 31, 2004. Prior
to January 1, 2005, approximately 40% of the Company's inventories were
determined using the last-in, first-out ("LIFO") method, with the balance
determined primarily using an average cost method. Effective January 1, 2005,
the Company changed its method for inventory costing from the LIFO method to the
specific identification cost method for the inventories previously accounted for
under the LIFO cost method. With the significant volatility seen recently in raw
material prices, the Company believes this change in accounting method provides
a better matching of revenues and expenses. As required by accounting principles
generally accepted in the United States of America ("GAAP"), the Company has
restated its financial statements for prior periods. As a result, the Company's
net inventory balance as of December 31, 2004 increased by $26.7 million from
the previously reported amount, with corresponding decrease to the Company's
accumulated deficit. There was no impact on the Company's cash flow from
operations for 2004 or 2003 related to this accounting change. The effect of the
accounting change on income for 2004 was to (i) reduce cost of sales with a
corresponding increase in net income attributable to common stockholders by $7.8
million, (ii) increase earnings per basic share by $0.12 and (iii) increase
earnings per diluted share by $0.11. The effect of the accounting change on
income for 2003 was to (i) increase cost of sales with a corresponding decrease
in net income attributable to common stockholders by $11.4 million and (ii)
decrease earnings per basic and diluted share by $0.18. See Note 3.
Cost of sales includes costs for materials, packing and finishing,
utilities, maintenance and depreciation, shipping and handling, and salaries and
benefits.
Investments. The Company's marketable securities, including the shares of
CompX International, Inc. ("CompX") contributed by the Company and held by CompX
Group, Inc. ("CGI") (based upon the Company's redemption option), are classified
as available-for-sale securities and are carried at fair value based upon quoted
market prices, with unrealized gains and/or losses included in stockholders'
equity as a component of other comprehensive income. The Company evaluates its
investments in marketable securities whenever events or conditions occur to
indicate that the fair value of such investments has declined below their
carrying amounts. If the decline in fair value is judged to be other than
temporary, the carrying amount of the security is written down to fair value.
See further discussion in Note 4.
Investments in 20% to 50% owned joint ventures are accounted for by the
equity method. Additionally, TIMET's 100% owned investment in the Capital Trust
is accounted for by the equity method, as further discussed in Note 12.
Differences between the Company's investment in joint ventures and its
proportionate share of the joint ventures' reported equity are amortized based
upon the respective useful lives of the assets to which the differences relate.
Property, equipment and depreciation. Property and equipment are recorded
at cost and depreciated principally on the straight-line method over the
estimated useful lives of 15 to 40 years for buildings and two to 25 years for
machinery and equipment. Capitalized software costs are amortized over the
software's estimated useful life, generally three to five years. Maintenance
(including planned major maintenance), repairs and minor renewals are expensed
as incurred and included in cost of sales. Major improvements are capitalized
and depreciated over the estimated period to be benefited. The Company's total
interest cost incurred on bank debt during 2005 and 2004 was $3.9 million and
$2.7 million, respectively, of which approximately $648,000 and $28,000 was
capitalized during 2005 and 2004, respectively. No interest was capitalized
during 2003.
Generally, when events or changes in circumstances indicate the carrying
amount of long-lived assets, including property and equipment, may not be
recoverable, the Company prepares an evaluation comparing the carrying amount of
the assets to the undiscounted expected future cash flows of the assets or asset
group. If this comparison indicates the carrying amount is not recoverable, the
amount of the impairment would typically be calculated using discounted expected
future cash flows or appraised values. All relevant factors are considered in
determining whether an impairment exists.
Intangible assets and amortization. Patents and other intangible assets,
except intangible pension assets, are recorded at cost and amortized using the
straight-line method over the estimated period of benefit, generally seven to
nine years. The Company assesses the amortization period and recoverability of
the carrying amount of patents and other intangible assets at least annually or
when events or circumstances require, and the effects of revisions are reflected
in the period they are determined to be necessary.
Asset retirement obligations. The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement
Obligations, on January 1, 2003. Under SFAS No. 143, the fair value of a
liability for an asset retirement obligation covered under the scope of SFAS No.
143 is recognized in the period in which the liability is incurred, with an
offsetting increase in the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its future value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, in 2003 the Company
recognized (i) an asset retirement cost capitalized as an increase to the
carrying value of its property, plant and equipment of approximately $0.2
million, (ii) accumulated depreciation on such capitalized cost of approximately
$0.1 million and (iii) an other noncurrent liability for the asset retirement
obligation of approximately $0.3 million. The difference between the amounts to
be recognized as previously described and any associated amounts recognized in
the Company's balance sheet as of December 31, 2002 was recognized as a
cumulative effect of a change in accounting principle as of January 1, 2003. The
Company has recorded asset retirement obligations of $0.5 million as of December
31, 2005 and 2004.
The Company's asset retirement obligations relate primarily to landfill
closure and leasehold restoration costs. Additionally, the Company is aware of
the existence of asbestos at its facility in Toronto, Ohio. Currently, there is
no legal obligation to remove or remediate this asbestos. However, if in the
future the Company decides, among other things, to undergo a major renovation or
demolish the property containing the asbestos, the Company may have an
obligation to remove and dispose of or remediate such asbestos in accordance
with the applicable environmental regulations. In accordance with FASB
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations,
as of December 31, 2005, the Company has not recorded a liability related to
this potential obligation because the settlement date of such obligation is
indeterminate and, therefore, the Company cannot reasonably estimate the fair
value of such liability.
Fair value of financial instruments. Carrying amounts of certain of the
Company's financial instruments including, among others, cash and cash
equivalents and accounts receivable, approximate fair value because of their
short maturities. The Company's bank debt reprices with changes in market
interest rates and, accordingly, the carrying amount of such debt is believed to
approximate market value. The Company's Series A Preferred Stock is also a
publicly traded security (ticker symbol "TIELP.PK"). Based upon the last traded
value of the Series A Preferred Stock ($217.37 per share) as of December 31,
2005, the market value of such securities, which the Company believes provides a
reasonable estimate of fair value, was $648.3 million as of December 31, 2005.
As of December 31, 2004, the fair value of the Series A Preferred Stock was
$218.0 million.
The Company's 6.625% convertible junior subordinated debentures due 2026
(the "Subordinated Debentures") held by the Capital Trust were issued at a fixed
rate; however, the 6.625% mandatorily redeemable convertible preferred
securities, beneficial unsecured convertible securities ("BUCS") issued by the
Capital Trust are a publicly traded security (ticker symbol "TMCXP.PK"). Based
on the last traded value of the BUCS as of December 31, 2004, the aggregate fair
value of the outstanding Subordinated Debentures related to the 115,717
outstanding BUCS approximated $1.9 million. During 2005, the trading volume of
the BUCS was minimal and, therefore, the Company does not believe the last
traded value of the BUCS necessarily provides a fair value of the underlying
Subordinated Debentures. The BUCS are convertible, at the option of the holder,
into TIMET common stock at the rate of 2.678 shares of common stock per BUCS, an
equivalent price of $18.67 per share. Based on the last traded value of TIMET
common stock ($31.63 per share) on December 31, 2005, the "as converted" value
of the 113,467 BUCS outstanding at December 31, 2005 (which the Company believes
provides a reasonable estimate of the fair value of the Subordinated Debentures)
was $9.6 million.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is deemed to be other than the U.S. dollar are
translated at year-end rates of exchange, and revenues and expenses are
translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in the currency translation adjustments
component of other comprehensive income (loss). Currency transaction gains and
losses are recognized in income currently. The Company recognized net currency
transaction gains of $2.3 million in 2005 and net currency transaction losses of
$0.5 million in 2004 and $0.2 million in 2003.
Derivative transactions. VALTIMET, the Company's 43.7% owned affiliate
accounted for by the equity method, has entered into certain derivative
financial instruments that qualify as cash flow hedges under GAAP. The Company's
pro-rata share of VALTIMET's unrealized net gains (losses) on such derivative
financial instruments is included as a component of other comprehensive income.
The Company has no other derivative instruments.
Stock-based compensation. The Company currently follows the disclosure
alternative prescribed by SFAS No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, and has chosen to account for its stock-based employee
compensation related to stock options in accordance with Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and its
various interpretations. Under APB No. 25, compensation expense is generally
recognized for fixed stock options for which the exercise price is less than the
market price of the underlying stock on the grant date. All of the Company's
stock options were granted with exercise prices equal to or in excess of the
market price on the date of grant, and the Company recognized no compensation
expense for stock options in 2005, 2004 or 2003. The following table illustrates
the effect on net income (loss) and income (loss) per share attributable to
common stockholders if the Company had applied the fair value recognition
provisions of SFAS No. 123 to all options granted since January 1, 1995:
Year ended December 31,
-------------------------------------------------------
2004 2003
2005 (restated) (restated)
---------------- ---------------- ----------------
(In thousands, except per share data)
Net income (loss) attributable to
common stockholders, as reported $ 143,701 $ 43,300 $ (24,443)
Less stock option related stock-based
employee compensation expense
determined under SFAS No. 123 (5) (65) (215)
---------------- ---------------- ----------------
Pro forma net income (loss) attributable
to common stockholders $ 143,696 $ 43,235 $ (24,658)
================ ================ ================
Basic earnings (loss) per share attributable to common stockholders:
As reported $ 2.20 $ 0.68 $ (0.39)
================ ================ ================
Pro forma $ 2.20 $ 0.68 $ (0.39)
================ ================ ================
Diluted earnings (loss) per share attributable to common stockholders:
As reported $ 1.72 $ 0.66 $ (0.39)
================ ================ ================
Pro forma $ 1.72 $ 0.66 $ (0.39)
================ ================ ================
Employee benefit plans. Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 17.
Revenue recognition. Sales revenue is generally recognized when the Company
has certified that its product meets the related customer specifications, the
product has been shipped, and title and substantially all the risks and rewards
of ownership have passed to the customer. Payments received from customers in
advance of these criteria being met are recorded as customer advances until
earned. For inventory consigned to customers, sales revenue is recognized when
(i) the terms of the consignment end, (ii) the Company has completed performance
of all significant obligations and (iii) title and substantially all of the
risks and rewards of ownership have passed to the customer. Amounts charged to
customers for shipping and handling are included in net sales. Sales revenue is
stated net of price and early payment discounts.
Research and development. Research and development expense, which includes
activities directed toward expanding the use of titanium and titanium alloys in
all market sectors, is recorded as selling, general, administrative and
development expense as incurred and totaled $3.2 million in 2005, $2.9 million
in 2004 and $2.8 million in 2003. Related engineering and experimentation costs
associated with ongoing commercial production are recorded in cost of sales.
Advertising costs. Advertising costs, which are not significant, are
expensed as incurred.
Self-insurance. The Company is self insured for certain exposures relating
to employee and retiree medical benefits and workers' compensation claims. The
Company purchases insurance from third-party providers, which limits its maximum
exposure to $150,000 per occurrence for employee medical benefits and $500,000
per occurrence for workers' compensation claims. The Company paid $12.7 million
during 2005, $14.9 million during 2004 and $11.9 million during 2003 related to
employee medical benefits and $403,000 during 2005, $334,000 during 2004 and
$139,000 during 2003 related to workers' compensation claims. The Company also
maintains insurance from third-party providers for automobile, property,
product, fiduciary and other liabilities, which are subject to various
deductibles and policy limits typical to these types of insurance policies. See
Note 18 for discussion of policies provided by related parties.
Income taxes. Deferred income tax assets and liabilities are recognized
based on the expected future tax consequences of temporary differences between
the income tax and financial reporting carrying amounts of assets and
liabilities, including investments in subsidiaries not included in TIMET's
consolidated U.S. tax group. The Company periodically reviews its deferred tax
assets to determine if future realization is "more-likely-than-not," and a
change in the valuation allowance is recorded in the period it is determined to
be necessary. See Note 16.
Accounting principles not yet adopted. In November 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, which clarifies the types of costs that
should be expensed rather than capitalized as inventory. This statement also
clarifies the circumstances under which fixed overhead costs associated with
operating facilities involved in inventory processing should be capitalized. The
guidance is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005, and the Company will adopt SFAS No. 151 as of January 1,
2006. The Company does not expect that the adoption of SFAS No. 151 will have a
material impact on its consolidated financial position or results of operations.
In September 2005, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 04-13, Accounting for Purchases and Sales of Inventory with
the Same Counterparty ("EITF 04-13"). The FASB Task Force concluded that
inventory purchases and sales transactions with the same counterparty should be
combined for accounting purposes if they were entered into in contemplation of
each other. The EITF provided indicators to be considered for purposes of
determining whether such transactions are entered into in contemplation of each
other. Guidance was also provided on the circumstances under which nonmonetary
exchanges of inventory within the same line of business should be recognized at
fair value. EITF 04-13 will be effective in reporting periods beginning after
March 15, 2006. The Company has not yet determined the impact, if any, the
adoption of EITF 04-13 will have on its consolidated financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS No. 123R"), which replaces SFAS No. 123 and supersedes APB No.
25. SFAS No. 123R requires the measurement of all employee share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. Under SFAS No. 123R, the
pro forma disclosures previously permitted under SFAS No. 123 will no longer be
an alternative to financial statement recognition. Under the transition
alternatives permitted under SFAS No. 123R, the Company will apply the new
standard to any new awards granted on or after January 1, 2006, and to all
awards existing as of December 31, 2005 which are subsequently modified,
repurchased or cancelled. If the Company were to grant a significant number of
options or modify, repurchase or cancel existing options in the future, the
Company could recognize material amounts of compensation cost related to such
options in its consolidated financial statements. As permitted by regulations of
the SEC, the Company will adopt SFAS No. 123R as of January 1, 2006 and does not
believe the adoption of SFAS No. 123R will have a material effect on the
Company's financial position or results of operations, as all of TIMET's
outstanding options will be fully vested as of the adoption date. SFAS No. 123R
requires certain expanded disclosures regarding the Company's stock options, and
such expanded disclosures have been provided in Note 14.
Note 3 - Inventories
December 31,
-------------------------------------------
2004
2005 (restated)
------------------ --------------------
(In thousands)
Raw materials $ 89,956 $ 71,067
Work-in-process 169,856 97,470
Finished products 73,395 67,756
Inventory consigned to customers 20,000 17,944
Supplies 12,489 12,397
------------------ --------------------
$ 365,696 $ 266,634
================== ====================
Effective January 1, 2005, the Company changed its method for inventory
determination from the LIFO cost method to the specific identification cost
method for the approximate 40% of the Company's consolidated inventories
previously accounted for under the LIFO cost method. With the significant
volatility seen recently in raw material prices, the Company believes this
change in accounting method provides a better matching of revenues and expenses.
As required by GAAP, the Company has restated its financial statements for prior
periods. As a result of the accounting change, the Company's net inventory
balance as of December 31, 2004 increased by $26.7 million from the previously
reported amount (representing the elimination of the Company's LIFO reserve at
such date), with a corresponding decrease to the Company's accumulated deficit.
The following table provides the effect of the accounting change on the
Company's results of operations for 2005, 2004 and 2003:
Year ended December 31,
----------------------------------------------------------
2005 2004 2003
----------------- ----------------- ----------------
(In thousands)
Net income (loss) attributable to common stockholders:
Prior to change in accounting method $ 122,521 $ 35,541 (1) $ (13,057) (1)
Decrease (increase) in cost of sales
related to change in accounting method, net of
applicable income taxes 21,180 7,759 (11,386)
----------------- ----------------- ----------------
After change in accounting method $ 143,701 $ 43,300 $ (24,443)
================= ================= ================
Basic earnings (loss) per share attributable to common stockholders:
Prior to change in accounting method $ 1.88 $ 0.56 (1) $ (0.21) (1)
Increase (decrease) related to change in
accounting method 0.32 0.12 (0.18)
----------------- ----------------- ----------------
After change in accounting method $ 2.20 $ 0.68 $ (0.39)
================= ================= ================
Diluted earnings (loss) per share attributable to common stockholders:
Prior to change in accounting method $ 1.49 $ 0.55 (1) $ (0.21) (1)
Increase (decrease) related to change in
accounting method 0.23 0.11 (0.18)
----------------- ----------------- ----------------
After change in accounting method $ 1.72 $ 0.66 $ (0.39)
================= ================= ================
--------------------------------------------------------------------------------------------------------------------------
(1) As previously reported.
Note 4 - Marketable securities
The following table summarizes the Company's marketable securities as of
December 31, 2005:
Unrealized
Marketable security Shares Market value Cost basis gains (losses)
-------------------------------------------- ------------- ----------------- --------------- ---------------
($ in thousands)
As of December 31, 2005:
CompX (1) 2,696,420 $ 43,197 $ 34,234 $ 8,963
NL Industries, Inc. ("NL") 222,100 3,129 2,461 668
Kronos Worldwide, Inc. ("Kronos") 5,203 151 202 (51)
----------------- --------------- ---------------
$ 46,477 $ 36,897 $ 9,580
================= =============== ===============
As of December 31, 2004:
CompX (1) 2,549,520 $ 42,144 $ 32,011 $ 10,133
NL Industries, Inc. ("NL") 222,100 4,908 2,461 2,447
Kronos Worldwide, Inc. ("Kronos") 3,985 162 145 17
----------------- --------------- ---------------
$ 47,214 $ 34,617 $ 12,597
================= =============== ===============
-------------------------------------------------------------------------------------------------------------------------
(1) The Company directly held 483,600 and 336,700 shares of CompX as of
December 31, 2005 and 2004, respectively. The remaining 2,212,820 shares as
of December 31, 2005 and 2004 were held by CGI. See further discussion
below.
During the first nine months of 2004, the Company purchased 2,212,820
shares of CompX Class A common shares, representing approximately 14.6% of the
total number of shares of all classes of CompX common stock outstanding at that
date. At September 30, 2004, NL, a subsidiary of Valhi, held an additional 68.4%
of CompX. Effective on October 1, 2004, the Company and NL contributed 100% of
their respective holdings on that date of all classes of CompX common stock to
CGI in return for a 17.6% and 82.4% ownership interest in CGI, respectively, and
CGI became the holder of the 83.0% of CompX that the Company and NL had
previously held in the aggregate. The CompX shares are the sole assets of CGI.
The Company's shares of CGI are redeemable at the option of the Company based
upon the market value of the underlying CompX stock held by CGI, and if the
Company so elects to redeem its shares of CGI, the Company can require CGI to
pay the redemption price for its CGI shares in the form of shares of CompX
common stock, with the number of CompX shares received equal to the pro-rata
portion of the number of shares of CompX the Company originally contributed to
CGI at CGI's formation, based on the number of CGI shares so redeemed.
Accordingly, the Company accounts for its investment in CGI as an
available-for-sale marketable security carried at fair value based on the fair
value of the underlying CompX shares held by CGI.
As of December 31, 2005 and 2004, the Company directly held 483,600 and
336,700 respectively, shares of CompX, which were purchased subsequent to
October 1, 2004. The Company has not contributed any of the shares purchased
subsequent to October 1, 2004 to CGI.
At December 31, 2005 and 2004, the Company held approximately 0.5% of NL's
outstanding common stock, and Valhi and a wholly owned subsidiary of Valhi held
an additional 83% in the aggregate.
During 2005 and 2004, NL paid dividends on its common stock in the form of
(i) cash and (ii) shares of Kronos common stock. At December 31, 2005 and 2004,
the Company held less than 0.1% of Kronos' outstanding common stock and Valhi
and NL held an additional 93% in the aggregate. During 2005, CompX and Kronos
each paid cash dividends on their respective common stock.
Note 5 - Investment in joint ventures
December 31,
--------------------------------------
2005 2004
----------------- -----------------
(In thousands)
VALTIMET SAS ("VALTIMET") $ 25,911 $ 22,466
MZI, LLC ("MZI") 67 125
----------------- -----------------
$ 25,978 $ 22,591
================= =================
VALTIMET is a manufacturer of welded stainless steel and titanium tubing
with operations in the United States, France, South Korea and China. At December
31, 2005, VALTIMET was owned 43.7% by TIMET, 51.3% by Valinox Welded, a French
manufacturer of welded tubing, and 5.0% by Sumitomo Metals Industries, Ltd., a
Japanese manufacturer of steel products. At December 31, 2004, the unamortized
net difference between the Company's carrying amount of its investment in
VALTIMET and its proportionate share of VALTIMET's net assets was $3.3 million,
and is principally attributable to the difference between the carrying amount
and fair value of fixed assets initially contributed by TIMET. This difference
is being amortized over 15 years and reduces the amount of equity in earnings or
increases the amount of equity in losses that the Company reports related to its
investment in VALTIMET. The Company received dividends related to 2004 from
VALTIMET of $1.1 million in February 2006, which were declared during 2005 and
accrued on the Company's financial statements as of December 31, 2005. During
2004, the Company received dividends related to 2003 from VALTIMET of $1.7
million.
MZI provides certain testing services and is 33.3% owned by TIMET with the
remainder owned by another titanium manufacturer.
In November 2005, the Company entered into a joint venture with XI'AN
BAOTIMET VALINOX TUBES CO. LTD. ("BAOTIMET") to produce welded titanium tubing
in the Peoples Republic of China. As of December 31, 2005, the Company, through
a wholly owned subsidiary, held an 11% direct interest in BAOTIMET, although
none of the joint venture partners had contributed any funds to the joint
venture as of such date. The remaining ownership interests in BAOTIMET are (i)
40% held by Baoji Titanium Industry Co. Ltd., one of China's principal producers
of titanium products, (ii) 20% held by VALTIMET and (iii) 29% held by Changzhou
Valinox Great Wall Welded Tube Co. Ltd. (a 66%-owned subsidiary of VALTIMET). At
December 31, 2005, TIMET had an obligation to contribute a total of $0.7 million
to the joint venture, which was contributed in the first quarter of 2006.
VALTIMET and MZI are exempted from the scope of FASB Interpretation No. 46
("FIN 46R"), Consolidation of Variable Interest Entities (an interpretation of
Accounting Research Bulletin No. 51). Therefore, the current SFAS No. 94 model,
under which consolidation is based upon control (generally defined as ownership
of more than 50% of an entity), continues to apply to these entities.
Note 6 - Property and equipment
December 31,
---------------------------------------
2005 2004
------------------ -----------------
(In thousands)
Land and improvements $ 8,922 $ 8,703
Buildings and improvements 37,259 31,780
Information technology systems 61,175 63,609
Manufacturing equipment and other 348,080 333,031
Construction in progress 31,488 14,819
------------------ -----------------
486,924 451,942
Less accumulated depreciation 233,934 223,769
------------------ -----------------
$ 252,990 $ 228,173
================== =================
See Note 11 with respect to the Company's property and equipment held under
capital leases.
During the first quarter of 2005, the Company determined that certain of
its manufacturing equipment would no longer be utilized in its operations, and,
accordingly, recognized a $1.2 million noncash abandonment charge to cost of
sales during the period.
In November 2004, pursuant to an agreement with Basic Management, Inc. and
certain of its affiliates ("BMI"), the Company sold certain property located
adjacent to its Henderson, Nevada plant site to BMI, a 32%-owned indirect
subsidiary of Valhi, and recorded a $12.0 million deferred gain related to the
cash proceeds received in November 2004. During the second quarter of 2005, the
Company ceased using the property and, accordingly, recognized a $13.9 million
non-operating gain related to the sale of such property, which is comprised of
(i) the previously reported $12.0 million cash proceeds received in November
2004, (ii) the reversal of $0.6 million previously accrued by the Company for
potential environmental issues related to the property and (iii) an additional
$1.2 million cash payment received from BMI in June 2005. See Note 19.
Note 7 - Intangible assets
As of December 31, 2005 and 2004, the Company's intangible assets with
definite lives are solely comprised of patents. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, the Company has evaluated the remaining
useful lives of its patents, which will become fully amortized during 2006. The
carrying amount and accumulated amortization of the Company's intangible assets
are as follows:
December 31, 2005 December 31, 2004
---------------------------------- --------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------------- --------------- -------------- --------------
(In thousands)
Intangible assets:
Definite lives, subject to amortization:
Patents $ 8,789 $ 8,106 $ 14,874 $ 13,224
Other intangible asset - pension asset (1) - - 3,407 -
-------------- --------------- -------------- --------------
$ 8,789 $ 8,106 $ 18,281 $ 13,224
============== =============== ============== ==============
-----------------------------------------------------------------------------------------------------------------------
(1) Not covered by the scope of SFAS No. 142.
The Company's amortization expense relating to its intangible assets was
$1.0 million in 2005, $1.5 million in 2004 and $1.7 million in 2003. The Company
expects its aggregate amortization expense during 2006 will approximate $0.7
million.
Note 8 - Other noncurrent assets
December 31,
---------------------------------------
2005 2004
------------------ -----------------
(In thousands)
Deferred financing costs $ 177 $ 786
Prepaid pension cost 22,337 10,531
Notes receivable from officers - 49
Other 163 211
------------------ -----------------
$ 22,677 $ 11,577
================== =================
The Company's deferred financing costs relate to the issuance of the
Company's BUCS and are amortized on a straight-line basis through 2026. See Note
12 for further discussion of the BUCS deferred financing costs. See Note 17 for
further discussion of the prepaid pension cost.
Note 9 - Accrued liabilities
December 31,
--------------------------------------
2005 2004
----------------- -----------------
(In thousands)
OPEB cost $ 2,181 $ 2,777
Pension cost 5,353 5,285
Payroll and vacation 6,227 5,810
Incentive compensation 20,091 12,570
Other employee benefits 9,938 9,721
Deferred revenue 14,525 10,046
Environmental costs 1,718 2,530
Taxes, other than income 5,318 4,166
Other 10,347 8,535
----------------- -----------------
$ 75,698 $ 61,440
================= =================
See Note 19 with regard to environmental costs.
Effective January 1, 2004, the Company modified the vacation policy for its
U.S. salaried employees, whereby such employees no longer accrue their entire
year's vacation entitlement on January 1, but rather accrue the current year's
vacation entitlement over the course of the year. As a result, in January 2004
the Company reduced its $1.9 million vacation accrual as of December 31, 2003
for these employees to zero.
Under the terms of the Company's long-term agreement ("LTA") with The
Boeing Company ("Boeing"), Boeing is required to purchase from the Company a
buffer inventory of titanium products for use by the Company in the production
of titanium products ordered by Boeing in the future. As the buffer inventory is
completed, Boeing is billed and takes title to the inventory, although the
Company could retain an obligation to further process the material as directed
by Boeing. Accordingly, the revenue and costs of sales on the buffer inventory
is deferred and subsequently recognized at the time the final mill product is
delivered to Boeing. As of December 31, 2005 and 2004, $9.0 million and $9.9
million of the Company's deferred revenue related to the buffer inventory,
respectively.
Note 10 - Customer advances
Under the terms of the Company's previous LTA with Boeing, in 2002 through
2007, Boeing would have been required to advance TIMET $28.5 million annually
less $3.80 per pound of titanium product purchased by Boeing subcontractors from
TIMET during the preceding year. The advance related to Boeing's take-or-pay
obligations under the previous LTA. Effectively, the Company collected $3.80
less from Boeing than the LTA selling price for each pound of titanium product
sold directly to Boeing and reduced the related customer advance recorded by the
Company. For titanium products sold to Boeing subcontractors, the Company
collected the full LTA selling price, but gave Boeing credit by reducing the
next year's annual advance by $3.80 per pound of titanium product sold to Boeing
subcontractors. The Boeing customer advance was also reduced as take-or-pay
benefits were earned. As of December 31, 2005, approximately $0.7 million of
customer advances related to the Company's previous LTA with Boeing, which was
refunded to Boeing in 2006.
Effective July 1, 2005, the Company entered into a new LTA with Boeing for
the purchase and sale of titanium products. The new LTA expires on December 31,
2010 and provides for, among other things, (i) mutual annual purchase and supply
commitments by both parties, (ii) continuation of the existing buffer inventory
program currently in place for Boeing and (iii) certain improved product
pricing. Beginning in 2006, the new LTA also replaces the take-or-pay provisions
of the previous LTA with an annual makeup payment early in the following year in
the event Boeing purchases less than its annual volume commitment in any year.
See Note 15.
Note 11 - Bank debt and capital lease obligations
December 31,
---------------------------------------
2005 2004
------------------ -----------------
(In thousands)
Notes payable - U.S. credit facility $ - $ 43,176
================== =================
Long-term debt:
U.S. credit facility $ 40,255 $ -
U.K. credit facility 11,104 -
------------------ -----------------
$ 51,359 $ -
================== =================
Capital lease obligations $ 157 $ 197
Less current maturities 19 22
------------------ -----------------
$ 138 $ 175
================== =================
Long-term bank credit agreements. As of December 31, 2005, the Company's
outstanding borrowings under its U.S. credit agreement were $40.3 million and
excess availability was approximately $79 million. On February 17, 2006, the
Company entered into a new $175 million long-term credit agreement (the "New
U.S. Facility"), replacing its previous U.S credit agreement, which was
terminated on that date. The New U.S. Facility is secured primarily by the
Company's U.S. accounts receivable, inventory, personal property, intangible
assets, a pledge of 65% of TIMET UK's common stock and a negative pledge on U.S.
fixed assets, and matures in February 2011. Borrowings under the New U.S.
Facility accrue interest at the U.S. prime rate or varying LIBOR-based rates
based on a quarterly ratio of outstanding debt to EBITDA as defined by the
agreement. The New U.S. Facility also provides for the issuance of up to $10
million of letters of credit.
The New U.S. Facility contains certain restrictive covenants, that, among
other things, limit or restrict the ability of the Company to incur debt, incur
liens, make investments, make capital expenditures or pay dividends. The New
U.S. Facility also requires compliance with certain financial covenants,
including minimum tangible net worth, a fixed charge coverage ratio and a
leverage ratio, and contains other covenants customary in lending transactions
of this type including cross-default provisions with respect to other debt and
obligations of the Company. Borrowings under the New U.S. Facility are limited
to the lesser of $175 million or a formula-determined amount based upon U.S.
accounts receivable, inventory and fixed assets (subject to pledging fixed
assets). Such formula-determined amount only applies if borrowings exceed 60% of
the commitment amount or the leverage ratio exceeds a certain limitation. At
February 17, 2006, approximately $21 million was outstanding under the New U.S.
Facility and $4.4 million of letters of credit were issued and outstanding. The
Company's previous U.S. credit agreement contained similar covenant compliance
requirements, and the Company was in compliance with all such covenants for all
periods during the years ended December 31, 2005 and 2004.
Under the previous U.S. credit agreement, the Company was required to
maintain a lock box arrangement whereby daily net cash receipts were used to
reduce outstanding borrowings. Accordingly, any outstanding balances under the
previous U.S. credit agreement were classified as a current liability,
regardless of the maturity date of the agreement. As a result of the Company's
entrance into the New U.S. Facility, which does not contain a similar
requirement regarding application of daily net cash receipts, borrowings under
the Company's previous U.S. credit agreement have been re-classified to
long-term on the Company's balance sheet as of December 31, 2005. Under the
Company's previous U.S. credit agreement, interest accrued at rates based on
LIBOR plus 2% and bank prime rate plus 0.5%. The weighted average interest rate
on borrowings outstanding was 6.4% as of December 31, 2005 and 4.3% as of
December 31, 2004. Borrowings were collateralized by substantially all of the
Company's U.S. assets.
During the second quarter of 2005, the Company's subsidiary, TIMET UK,
terminated its previous credit facility (the "U.K. Facilities") and entered into
a new working capital credit facility (the "New U.K. Facility") that expires on
April 30, 2008. Under the New U.K. facility, TIMET UK may borrow up to
(pound)22.5 million, subject to a formula-determined borrowing base derived from
the value of accounts receivable, inventory and property, plant and equipment.
Borrowings under the New U.K. facility can be in various currencies, including
U.S. dollars, British pounds sterling and euros and are collateralized by
substantially all of TIMET UK's assets. Interest on outstanding borrowings
generally accrues at rates that vary from 1.125% to 1.375% above the lender's
published base rate. The New U.K. facility also contains financial ratios and
covenants customary in lending transactions of this type, including a minimum
net worth covenant. TIMET UK was in compliance with all covenants for all
periods during the year ended December 31, 2005. As of December 31, 2005, the
Company's outstanding borrowings, which are due on April 30, 2008, under the New
U.K. Facility were $11.1 million, and excess availability was approximately $28
million. The weighted average interest rate on borrowings outstanding under the
New U.K. facility was 5.6% as of December 31, 2005.
The U.K. Facilities provided for borrowings limited to the lesser of
(pound)22.5 million or a formula-determined borrowing base derived from the
value of accounts receivable, inventory and property, plant and equipment. The
credit agreement included revolving and term loan facilities and an overdraft
facility and required the maintenance of certain financial ratios and amounts,
including a minimum net worth covenant and other covenants customary in lending
transactions of this type. TIMET UK was in compliance with all covenants for all
periods during the year ended December 31, 2004. The U.K. overdraft facility was
subject to annual review in December of each year and was renewed in December
2004. During the second quarter of 2003, TIMET UK received an interest-bearing
intercompany loan from a U.S. subsidiary of the Company enabling TIMET UK to
reduce its long-term borrowings under the U.K. Facilities to zero. This loan was
repaid in full during the third quarter of 2004. As of December 31, 2004, the
Company had no borrowings under the U.K. Facilities.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries that aggregate the equivalent of $19 million at
December 31, 2005. These facilities accrue interest at various rates and are
payable on demand. At December 31, 2005, approximately $2 million of letters of
credit had been issued under these facilities. As of December 31, 2005 and 2004,
there were no outstanding borrowings under these facilities, and unused
borrowing availability at December 31, 2005 was approximately $17 million.
Capital lease obligations. In January 2004, the Company purchased for $0.7
million substantially all of the U.S. equipment held under capital leases, which
were due to expire at various times during 2004 and 2005. During the fourth
quarter of 2004, three of the Company's U.K. lease agreements were amended such
that they no longer meet the criteria for capital lease treatment under SFAS No.
13, Accounting for Leases, and are now accounted for as operating leases.
Accordingly, the Company reduced its capital lease obligations and related net
property and equipment by $10.3 million and $7.8 million, respectively,
resulting in a $2.5 million deferred gain that the Company will recognize on a
straight-line basis over the term of the amended lease agreements, one of which
expires in 2014 and two of which expire in 2024. The Company's first rent
payment under the amended lease agreements is not due until October 2006, and
the Company is recognizing rent expense with respect to the amended lease
agreements based on the aggregate contractual rent payments allocated on a
straight-line basis over the terms of the amended lease agreements.
At December 31, 2005 and 2004, the Company held equipment under capital
leases of $0.2 million and $0.3 million, respectively. The related aggregate
accumulated depreciation was approximately $0.1 million at December 31, 2005 and
2004.
Aggregate maturities of capital lease obligations as of December 31, 2005
are reflected in the following table:
Amount
----------------------
(In thousands)
Year ending December 31,
2006 $ 28
2007 28
2008 28
2009 28
2010 and thereafter 78
----------------------
190
Less amounts representing interest 33
----------------------
$ 157
======================
Note 12 - Capital Trust
In November 1996, the Capital Trust issued $201.3 million BUCS and $6.2
million 6.625% common securities. TIMET owns all of the outstanding common
securities of the Capital Trust, and the Capital Trust is a wholly owned finance
subsidiary of TIMET. The Capital Trust used the proceeds from such issuance to
purchase from the Company $207.5 million principal amount of the Subordinated
Debentures. The Subordinated Debentures and accrued interest receivable are the
sole assets of the Capital Trust at December 31, 2005.
In August 2004, the Company completed an exchange offer, pursuant to which
the Company had offered to exchange any and all of the 4,024,820 outstanding
BUCS issued by the Capital Trust for shares of the Company's Series A Preferred
Stock at the exchange rate of one share of Series A Preferred Stock for each
BUCS. Based upon the 3,909,103 BUCS tendered and accepted for exchange as of the
close of the offer on August 31, 2004, the Company issued 3,909,103 shares of
Series A Preferred Stock in exchange for such BUCS. During the third quarter of
2004, the Company recognized a $15.5 million non-cash non-operating gain related
to the BUCS exchange, reflecting the difference between the carrying value of
the related Subordinated Debentures ($195.5 million) and the fair value of the
Series A Preferred Stock issued ($173.7 million, based on the closing price of
the BUCS on August 31, 2004 according to NASDAQ's website of $45.25 per share,
less $3.2 million attributable to accrued and unpaid dividends), less $6.3
million of unamortized deferred financing costs related to the exchanged BUCS.
The BUCS, which mature December 2026, do not require principal amortization
and are redeemable at the Company's option. The redemption price approximates
101% of the principal amount as of December 1, 2005 and declines to 100% on
December 1, 2006. The New U.S. Facility contains certain financial covenants
that may restrict the Company's ability to make distributions on the BUCS. The
Subordinated Debentures allow the Company the right to defer interest payments
for a period of up to 20 consecutive quarters, although interest continues to
accrue at the coupon rate on the principal and unpaid interest. Similarly, the
Capital Trust is permitted by the terms of the BUCS to defer its quarterly
dividend payments on the BUCS when TIMET defers interest payment on the
Subordinated Debentures. During 2002, the Company exercised its right to defer
interest payments on the Subordinated Debentures, effective for the December 1,
2002 scheduled interest payment. Interest continued to accrue at the 6.625%
coupon rate on the principal and unpaid interest until the Company's Board of
Directors approved resumption of scheduled quarterly interest payments on the
Subordinated Debentures beginning with the payment on June 1, 2004. The
Company's Board also approved payment of all previously deferred interest on the
Subordinated Debentures. On April 15, 2004, the Company paid the deferred
interest in the amount of $21.7 million, $21.0 million of which related to the
BUCS.
TIMET's guarantee of payment of the remaining outstanding BUCS (in
accordance with the terms thereof) and its obligations under the Capital Trust
documents constitute, in the aggregate, a full and unconditional guarantee by
the Company of the Capital Trust's obligations under the BUCS. The BUCS
represent undivided beneficial ownership interests in the Capital Trust, are
entitled to cumulative preferred distributions from the Capital Trust of 6.625%
per annum, compounded quarterly, and are convertible, at the option of the
holder, into TIMET common stock at the rate of 2.678 shares of common stock per
BUCS (an equivalent price of $18.67 per share), for an aggregate of 0.3 million
common shares if the 113,467 remaining BUCS are fully converted.
On September 1, 2005, the Company and the Capital Trust agreed to the
cancellation of 120,907 of the Capital Trust's common securities and a
corresponding cancellation of $6.0 million of the Company's Subordinated
Debentures. There was no net effect of this transaction on the Company's
consolidated financial position or results of operations, as the Company's
carrying value of the common securities of the Capital Trust that were cancelled
equaled the carrying value of the Subordinated Debentures that were also
cancelled.
On March 3, 2006, the Company called all of the outstanding BUCS for
redemption. The redemption price equals 100.6625% of the $50.00 liquidation
amount per BUCS, or $50.3313, plus accrued distributions to the March 24, 2006
redemption date on the BUCS of $0.2116 per BUCS. The Company expects to report a
nominal pre-tax loss related to the call of the BUCS.
Note 13 - Minority interest
Minority interest relates principally to the Company's 70%-owned French
subsidiary, TIMET Savoie, S.A. ("TIMET Savoie"). The Company has the right to
purchase from Compagnie Europeenne du Zirconium-CEZUS, S.A. ("CEZUS"), the
holder of the remaining 30% interest, CEZUS' interest in TIMET Savoie for 30% of
TIMET Savoie's equity determined under French accounting principles, or $13.3
million as of December 31, 2005. CEZUS has the right to require the Company to
purchase its interest in TIMET Savoie for 30% of TIMET Savoie's registered
capital, or $3.0 million as of December 31, 2005. TIMET Savoie made dividend
payments to CEZUS of $2.2 million in 2005 and $0.7 million in 2004.
Note 14 - Stockholders' equity
Preferred stock. At December 31, 2005, the Company was authorized to issue
10 million shares of preferred stock. The Board of Directors determines the
rights of preferred stock as to, among other things, dividends, liquidation,
redemption, conversions and voting rights.
Upon completion of the BUCS exchange offer discussed in Note 12, the
Company issued 3,909,103 shares of Series A Preferred Stock. Each share of the
Series A Preferred Stock is convertible, at any time, at the option of the
holder thereof, at a conversion price of $7.50 per share of the Company's common
stock (equivalent to a conversion rate of six and two-thirds shares of common
stock for each share of Series A Preferred Stock), with any partial shares paid
in cash. The conversion rate is subject to adjustment if certain events occur,
including, but not limited to, a stock dividend on the Company's common stock,
subdivisions or certain reclassifications of the Company's common stock or the
issuance of warrants to holders of the Company's common stock.
The Series A Preferred Stock is not mandatorily redeemable, but is
redeemable at the option of the Company at any time after September 1, 2007.
Holders of the Series A Preferred Stock are entitled to receive cumulative cash
dividends at the rate of 6.75% of the $50 per share liquidation preference per
annum per share (equivalent to $3.375 per annum per share), when, as and if
declared by the Company's board of directors. The Company paid $12.5 million in
2005 and $3.3 million in 2004 of such dividends. Whether or not declared,
cumulative dividends on Series A Preferred Stock are deducted from net income to
arrive at net income attributable to common stockholders. The Company's new U.S.
credit agreement contains certain financial covenants that may restrict the
Company's ability to make dividend payments on the Series A Preferred Stock. As
of December 31, 2005, net income attributable to common stockholders included
$0.8 million ($0.28 per outstanding share) of undeclared dividends. Subsequent
to December 31, 2005, the Company's board of directors declared a dividend of
$0.84375 per share, payable on March 15, 2006 to holders of record of Series A
Preferred Stock as of the close of trading on March 1, 2006.
During 2005, an aggregate of 926,490 shares of Series A Preferred Stock
were converted into 6,176,600 shares of TIMET common stock. As of December 31,
2005, there were 2,982,613 shares outstanding of the Series A Preferred Stock.
Subsequent to December 31, 2005 and through March 10, 2006, an additional
346,016 shares of Series A Preferred Stock were converted into 2,306,765 shares
of TIMET common stock.
Common stock. At December 31, 2005, the Company was authorized to issue 90
million shares of common stock. On February 15, 2006, the Company's certificate
of incorporation was amended to increase the number of authorized shares of
common stock to 200 million. The Company's new U.S. credit agreement, and the
Indenture pursuant to which the Subordinated Debentures were issued, limit the
payment of common stock dividends under certain circumstances. See also Note 12.
Treasury stock. On August 12, 2005, the Company retired all 180,000 shares
of its treasury stock. The retirement of such treasury stock, which had a cost
basis of $1.2 million, resulted in a $1,800 reduction of common stock, a
$990,000 reduction of additional paid-in capital and a $216,000 decrease in
accumulated earnings.
Restricted stock and common stock options. The Company's 1996 Long-Term
Performance Incentive Plan (the "Incentive Plan") provides for the discretionary
grant of restricted common stock, stock options, stock appreciation rights and
other incentive compensation to officers and other key employees of the Company.
Options generally vest over five years and expire ten years from date of grant.
No restricted stock or options have been issued since 2000 under the Incentive
Plan.
Eligible non-employee directors are covered by a plan that includes
stock-based grants as an element of director compensation (the "Director Plan").
In 2005, 2004 and 2003, the Director Plan provided for annual grants to each
non-employee director of 500 shares of the Company's common stock as partial
payment of director fees. Options previously granted to eligible directors
vested in one year and expire ten years from date of grant (five year expiration
for grants prior to 1998). The weighted average fair value at grant date of the
14,000, 70,000 and 60,000 total shares issued to non-employee directors in 2005,
2004 and 2003, respectively, was $139,825 in 2005, $343,055 in 2004 and $71,730
in 2003.
The weighted average remaining life of options outstanding under the
Incentive Plan and the Director Plan was 1.8 years at December 31, 2005 and 3.6
years at December 31, 2004. At December 31, 2005, 2004 and 2003, options to
purchase 1,038,360, 2,051,040 and 1,908,040 shares, respectively, were
exercisable at average exercise prices of $12.20, $9.20 and $9.72, respectively.
As of December 31, 2005, the amount payable upon exercise of options outstanding
was $12.7 million and the related aggregate intrinsic value (defined as the
excess of the market price of TIMET's common stock over the exercise price) was
$20.2 million. At December 31, 2005, 3,515,280 shares and 352,520 shares,
respectively, were available for future grant under the Incentive Plan and the
Director Plan. Shares issued under these plans are newly issued shares.
The following table summarizes information about the Company's stock
options:
Amount payable
Exercise price upon exercise Weighted-average
Options per option (in thousands) exercise price
------------ ----------------- ------------------- -------------------
Outstanding at December 31, 2002 2,465,000 $ 0.83-17.66 $ 22,607 $ 9.17
Canceled (247,120) $ 1.93-17.66 (2,726) $ 11.03
------------ -------------------
Outstanding at December 31, 2003 2,217,880 $ 0.83-17.66 19,881 $ 8.96
Exercised (20,200) $ 3.99 (81) $ 3.99
Canceled (46,640) $ 3.99-14.66 (495) $ 10.62
------------ -------------------
Outstanding at December 31, 2004 2,151,040 $ 0.83-17.66 19,305 $ 8.97
Exercised (1,095,600) $ 1.80-14.66 (6,443) $ 5.88
Canceled (17,080) $ 3.99-14.66 (198) $ 11.58
------------ -------------------
Outstanding at December 31, 2005 1,038,360 $ 0.83-17.66 $ 12,664 $ 12.20
============ ===================
The intrinsic value of the Company's options exercised aggregated $10.0
million in 2005 and $35 thousand in 2004, and the related income tax benefit
from such exercises was $3.8 million in 2005 and $13,000 in 2004.
As of December 31, 2004, 2,151,040 of the Company's outstanding options
were exercisable. The following table summarizes the Company's options
outstanding, all of which were exercisable, as of December 31, 2005 by price
range:
Options Outstanding and Exercisable
-----------------------------------------------------------------------------
Weighted average
remaining
Range of contractual life Weighted average
exercise prices Outstanding at 12/31/05 (in years) exercise price
-------------------------- ----------------------------- --------------------- -------------------------
$ 0.83-1.77 10,000 7.0 $ 0.83
$ 1.78-3.53 30,000 5.7 $ 1.94
$ 3.54-5.30 176,200 3.1 $ 4.13
$ 7.07-8.83 10,000 5.4 $ 7.11
$ 10.59-12.36 126,800 0.4 $ 11.50
$ 12.37-14.13 181,200 0.9 $ 13.74
$ 14.14-15.89 316,160 1.6 $ 14.76
$ 15.90-17.66 188,000 1.8 $ 16.93
-----------------------------
1,038,360 1.8 $ 12.20
=============================
Subsequent to December 31, 2005 and through March 10,I 2006, 453,960
options were exercised.
During 2000, the Company awarded 935,000 shares of TIMET restricted common
stock under the Incentive Plan to certain officers and employees. The stock
grant restrictions lapsed ratably on an annual basis over a five-year period.
Since holders of restricted stock have all of the rights of other common
stockholders, subject to forfeiture unless certain periods of employment are
completed, all such shares of restricted stock were considered currently issued
and outstanding. During 2004 and 2003, respectively, 10,600 and 71,600 shares of
restricted stock were forfeited. The market value of the restricted stock awards
was approximately $2.0 million ($2.19 per share) on the date of grant, and this
amount was recorded as deferred compensation, a separate component of
stockholders' equity.
The Company amortizes deferred compensation to expense on a straight-line
basis for each tranche of the award over the period during which the
restrictions lapse. During 2005, 2004 and 2003, respectively, 80,200, 88,400 and
101,400 shares of restricted stock vested, with an aggregate market value of
$0.6 million, $0.4 million and $0.1 million, respectively. Compensation cost,
net of income tax benefits, related to such shares of restricted stock
recognized for GAAP financial reporting purposes was less than $0.1 million in
each of 2005, 2004 and 2003. During February 2005, all of such shares of TIMET
restricted stock became fully vested.
Note 15 - Other income (expense)
Year ended December 31,
----------------------------------------------------
2005 2004 2003
-------------- -------------- ---------------
(In thousands)
Other operating income (expense):
Boeing take-or-pay $ 17,134 $ 22,093 $ 23,083
Litigation settlements - - 1,113
Insurance claim settlement - 648 -
Settlement of customer claim 1,800 - -
Other, net 1,366 248 193
-------------- -------------- ---------------
$ 20,300 $ 22,989 $ 24,389
============== ============== ===============
Other non-operating income (expense):
Dividends and interest $ 2,025 $ 687 $ 383
Equity in earnings of common securities
of the Capital Trust 279 424 432
Foreign exchange gain (loss), net 2,288 (477) (189)
Gain on sale of property (Note 6) 13,881 - -
Gain on BUCS exchange, net (Note 12) - 15,465 -
Other, net (245) 101 (920)
-------------- -------------- ---------------
$ 18,228 $ 16,200 $ (294)
============== ============== ===============
Based upon the terms of the Company's previous LTA with Boeing, the Company
received an annual $28.5 million (less $3.80 per pound of titanium product sold
to Boeing subcontractors in the preceding year) customer advance from Boeing in
January of each year related to Boeing's purchases from TIMET for that year.
Effective July 1, 2005, the Company entered into a new LTA with Boeing pursuant
to which, beginning in 2006, these take-or-pay provisions were replaced with an
annual makeup payment early in the following year in the event Boeing purchases
less than its annual commitment in any year. The previous LTA was structured as
a take-or-pay agreement such that Boeing forfeited $3.80 per pound of its
advance payment in the event that its orders for delivery were less than 7.5
million pounds in any given calendar year. The Company recognized income to the
extent Boeing's year-to-date orders for delivery plus TIMET's maximum quarterly
volume obligations for the remainder of the year totaled less than 7.5 million
pounds. This income was recognized as other operating income and was not
included in sales revenue, sales volume or gross margin. Based on actual
purchases of approximately 3.0 million pounds during 2005, the Company
recognized $17.1 million of take-or-pay income for the year ended December 31,
2005. The Company recognized $22.1 million and $23.1 million of such income
during 2004 and 2003, respectively. Recognition of the take-or-pay income
reduced the Boeing customer advance as described in Note 10.
During the first quarter of 2005, the Company received $1.8 million related
to its settlement of a customer claim regarding prior order cancellations from
such customer.
Note 16 - Income taxes
Summarized in the following table are (i) the components of income (loss)
before income taxes and minority interest ("pre-tax income (loss)"), (ii) the
difference between the income tax expense (benefit) attributable to pre-tax
income (loss) and the amounts that would be expected using the U.S. federal
statutory income tax rate of 35%, (iii) the components of the income tax expense
(benefit) attributable to pre-tax income (loss) and (iv) the components of the
comprehensive tax provision (benefit):
Year ended December 31,
-----------------------------------------------------
2004 2003
2005 (restated) (restated)
--------------- --------------- ----------------
(In thousands)
Pre-tax income (loss):
U.S. $ 119,799 $ 29,636 $ (14,817)
Non-U.S. 65,541 17,149 (7,850)
--------------- --------------- ----------------
$ 185,340 $ 46,785 $ (22,667)
=============== =============== ================
Expected income tax expense (benefit), at 35% $ 64,869 $ 16,375 $ (7,933)
Non-U.S. tax rates (1,134) (451) 535
Incremental tax on earnings of non-U.S. group affiliates 455 106 131
U.S. state income taxes, net 3,954 297 (1,050)
Dividends received deduction (331) (93) (312)
Nontaxable income (279) (98) (123)
Change in state rate 325 - -
Revision of estimated tax liability - (551) (241)
Elimination of minimum pension liability equity
adjustment component 4,405 - -
Tax on repatriation of foreign earnings 1,523 - -
Change in Valuation Allowance (50,096) (17,106) 10,076
Other, net 805 (611) 124
--------------- --------------- ----------------
$ 24,496 $ (2,132) $ 1,207
=============== =============== ================
Year ended December 31,
-----------------------------------------------------
2004 2003
2005 (restated) (restated)
--------------- --------------- ----------------
(In thousands)
Income tax expense (benefit):
Current income taxes:
U.S. $ 5,120 $ 648 $ 30
Non-U.S. 17,245 2,931 1,436
--------------- --------------- ----------------
22,365 3,579 1,466
--------------- --------------- ----------------
Deferred income taxes (benefit):
U.S. 10,638 (4,202) -
Non-U.S. (8,507) (1,509) (259)
--------------- --------------- ----------------
2,131 (5,711) (259)
--------------- --------------- ----------------
$ 24,496 $ (2,132) $ 1,207
=============== =============== ================
Comprehensive tax provision (benefit) allocable to:
Pre-tax income (loss) $ 24,496 $ (2,132) $ 1,207
Additional paid in capital (3,878) - -
Other comprehensive income:
Currency translation adjustment (48) - -
VALTIMET's unrealized net gains on derivative
financial instruments qualifying as cash flow
hedges (268) - -
Pension liabilities adjustment 2,949 - -
--------------- --------------- ----------------
$ 23,251 $ (2,132) $ 1,207
=============== =============== ================
The following table summarizes the Company's deferred tax assets and
deferred tax liabilities as of December 31, 2005 and 2004:
December 31,
-----------------------------------------------------------
2005 2004
---------------------------- ---------------------------
Assets Liabilities
Assets Liabilities (restated) (restated)
------------ ------------ ----------- ------------
(In millions)
Temporary differences relating to net assets:
Inventories $ - $ (8.7) $ - $ (13.2)
Property and equipment, including software - (34.8) - (29.9)
Goodwill 6.6 - 7.7 -
Accrued pension cost 11.8 - 21.1
Accrued OPEB cost 6.9 - 6.2 -
Accrued liabilities and other deductible differences 10.4 - 22.6 -
Other taxable differences - (10.2) - (8.0)
Tax loss and credit carryforwards 40.2 - 70.9 -
Valuation allowance (22.2) - (71.4) -
------------ ------------ ----------- ------------
Gross deferred tax assets (liabilities) 53.7 (53.7) 57.1 (51.1)
Netting (53.7) 53.7 (51.1) 51.1
------------ ------------ ----------- ------------
Total deferred taxes - - 6.0 -
Less current deferred taxes 19.4 - 5.0 -
------------ ------------ ----------- ------------
Net noncurrent deferred taxes $ (19.4) $ - $ 1.0 $ -
============ ============ =========== ============
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the first
quarter of 2005, based on the Company's recent history of U.S. income, its near
term outlook and the effect of its change in method of inventory determination
from the LIFO cost method to the specific identification cost method for U.S.
federal income tax purposes (see Note 2), the Company changed its estimate of
its ability to utilize the tax benefits of its U.S. net operating loss ("NOL")
carryforwards, alternative minimum tax ("AMT") credit carryforwards and other
net deductible temporary differences (other than the majority of the Company's
capital loss carryforwards). Consequently, the Company determined that its net
deferred income tax asset related to such U.S. tax attributes and other net
deductible temporary differences now meet the "more-likely-than-not" recognition
criteria. Accordingly, the Company reversed $36.9 million of the valuation
allowance attributable to such U.S. deferred income tax asset during 2005 ($8.6
million in the fourth quarter).
During the first quarter of 2005, based on the Company's recent history of
U.K. income, its near term outlook and its historic U.K. profitability, the
Company also changed its estimate of its ability to utilize its net deductible
temporary differences and other tax attributes related to the U.K., primarily
comprised of (i) the future benefits associated with the reversal of its U.K.
minimum pension liability deferred income tax asset and (ii) the benefits of its
U.K. NOL carryforward. Consequently, the Company determined that its net
deferred income tax asset in the U.K. now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed $13.2 million of the
valuation allowance attributable to such deferred income tax asset during 2005
($0.1 million in the fourth quarter).
During 2004, due to a change in estimate of the Company's ability to
utilize the benefits of its NOL carryforwards in Germany, the Company determined
that its deferred income tax asset in Germany met the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed the $0.7 million
valuation allowance attributable to such deferred income tax asset. In addition,
the Company's deferred income tax asset valuation allowance related to income
from continuing operations decreased by $16.4 million during 2004, primarily due
to the utilization of the U.S. and U.K. NOL carryforwards, the benefit of which
had previously not met the "more-likely-than-not" recognition criteria.
During the second quarter of 2005 and the fourth quarter of 2004, the
Company recognized a deferred income tax benefit related to a $0.5 million and
$4.2 million, respectively, decrease in the Company's U.S. deferred income tax
asset valuation allowance attributable to the Company's recognition, for U.S.
income tax purposes only, of a capital gain on the fourth quarter sale of
certain property located at the Company's Henderson, Nevada facility (see Note
6). The Company recognized a corresponding deferred income tax expense in 2005,
when the gain was recognized under accounting principles generally accepted in
the United States of America. The Company utilized a portion of its U.S. capital
loss carryforward to offset the income taxes generated from the sale of such
property.
The following table summarizes the components of the change in the
Company's deferred tax asset valuation allowance in 2005, 2004 and 2003:
Year ended December 31,
------------------------------------------------------
2004 2003
2005 (restated) (restated)
---------------- --------------- ---------------
(In thousands)
Effect of:
(Income) loss before income taxes $ (50,096) $ (17,106) $ 10,076
Cumulative effect of change in accounting method - - 60
Accumulated other comprehensive (income) loss 1,055 (1,582) (533)
Offset to the change in net deferred income tax
assets due principally to revision of estimated
tax liability - 4,651 -
Currency translation adjustment (232) 787 1,122
---------------- --------------- ----------------
$ (49,273) $ (13,250) $ 10,725
================ =============== ================
At December 31, 2005, the Company had, for U.S. federal income tax
purposes, (i) NOL carryforwards of $21 million that expire in 2022 and 2023,
(ii) a capital loss carryforward of $73 million that expires in 2008 and (iii)
AMT credit carryforwards of $4 million, which can be utilized to offset regular
income taxes payable in future years, with an indefinite carryforward period.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provides for a special 85% deduction for certain dividends
received from controlled foreign corporations in 2005. In the second quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would benefit from the special dividend received deduction, but the
Company did not distribute dividends under the Act until the third quarter of
2005. In the third quarter of 2005, the Company executed a reinvestment plan and
distributed $19 million of earnings from its European subsidiaries, which
qualified for the special dividend received deduction and, in accordance with
the requirements of FASB Staff Position No. 109-2, recognized the $1.0 million
income tax related to such repatriation. Additionally, in the fourth quarter of
2005, the Company determined that an additional $10 million of repatriations
would qualify for the special dividend received deduction, and the Company
recognized an additional $0.5 million income tax related to the fourth quarter
repatriation. The Company has not provided for U.S. deferred income taxes or
foreign withholding taxes on basis differences in its non-U.S. consolidated
subsidiaries that result primarily from undistributed earnings the Company
intends to reinvest indefinitely. The new law also provides for a special
deduction from U.S. taxable income equal to a specified percentage of a U.S.
company's qualified income from domestic manufacturing activities (as defined).
The Company believes that the majority of its operations meet the definition of
qualified domestic manufacturing activities. However, the Company did not derive
any benefit from the special manufacturing deduction in 2005, because the
Company's existing U.S. NOL carryforwards fully offset its 2005 U.S. taxable
income.
In June 2005, the State of Ohio enacted a new tax law, which phases out
Ohio's existing income tax system over the next five years and replaces it with
a tax based on gross receipts. In the second quarter of 2005, as a result of
this phase out, the Company reduced its deferred income tax asset related
primarily to its Ohio NOL carryforwards by $0.6 million. In the fourth quarter
of 2005, due primarily to updated income forecasts and revised timing
information on the recognition of certain temporary differences, the Company
increased its deferred income tax asset related primarily to its Ohio NOL
carryforwards by $0.3 million. The net impact of these adjustments for 2005 was
a decrease of $0.3 million. The provision for income taxes in 2005 includes $4.4
million of deferred income taxes resulting from the elimination of the Company's
minimum pension liability equity adjustment component of accumulated other
comprehensive income related to the Company's U.S. defined benefit pension plan.
In accordance with GAAP, the Company did not recognize a deferred income tax
benefit related to a portion of the minimum pension equity adjustment previously
recognized, as the Company had also recognized a deferred income tax asset
valuation related to its U.S. net operating loss carryforward and other U.S. net
deductible temporary differences during a portion of the periods in which the
minimum pension equity adjustment had previously been recognized. In accordance
with GAAP, a portion of such valuation allowance recognized ($4.4 million) was
recognized through the pension liability component of other comprehensive
income. As discussed, during 2005 the Company concluded recognition of such
deferred income tax asset valuation allowance was no longer required, and in
accordance with GAAP the reversal of all of such valuation allowance was
recognized through the provision for income taxes included in the determination
of net income, including the $4.4 million portion of the valuation allowance
which was previously recognized through other comprehensive income. As of
December 31, 2005, the Company was no longer required to recognize a minimum
pension liability related to its U.S. plan, and the Company reversed the minimum
pension liability previously recognized in other comprehensive income. After the
reversal of such minimum pension liability, which in accordance with GAAP was
recognized on a net-of-tax basis, the $4.4 million amount remained in
accumulated other comprehensive income related to the U.S. minimum pension
liability, which in accordance with GAAP is required to be recognized in the
provision for income taxes during the period in which the minimum pension
liability is no longer required to be recognized.
Note 17 - Employee benefit plans
Variable compensation plans. The majority of the Company's worldwide
employees participate in compensation programs providing for variable
compensation based primarily on the financial performance of the Company. The
cost of these plans was approximately $18.8 million in 2005, $12.1 million in
2004 and $0.4 million in 2003.
Defined contribution plans. Approximately 56% of the Company's worldwide
employees at December 31, 2005 participate in defined contribution pension plans
with employer contributions based upon a fixed percentage of the employee's
eligible earnings. All of the Company's U.S. employees (62% of worldwide
employees at December 31, 2005) are also eligible to participate in contributory
savings plans with partial matching employer contributions, although the Company
suspended making such partial matching contributions for certain employees from
April 1, 2003 through April 3, 2004. The cost of these pension and savings plans
approximated $4.1 million in 2005, $3.3 million in 2004 and $1.9 million in
2003.
Defined benefit pension plans. The Company maintains contributory defined
benefit pension plans covering a majority of its European employees and a
noncontributory defined benefit pension plan covering a minority of its U.S.
employees. The Company's funding policy is to annually contribute, at a minimum,
amounts satisfying the applicable statutory funding requirements. Between 1989
and 1995, the U.S. defined benefit pension plans were closed to new
participants. Additionally, in some cases, benefit levels have been frozen. As
of December 31, 2003, the U.S. plans were merged into one plan. The U.K. defined
benefit plan was closed to new participants in 1996; however, employees
participating in the plan continue to accrue additional benefits based on
increases in compensation and service.
Information concerning the Company's defined benefit pension plans, based
on a December 31 measurement date, is set forth in the following tables:
Year ended December 31,
---------------------------------------
2005 2004
------------------ -----------------
(In thousands)
Change in projected benefit obligations:
Balance at beginning of year $ 262,480 $ 223,091
Service cost 3,728 3,308
Participants' contributions 1,308 1,132
Interest cost 13,656 12,646
Plan amendments - 756
Actuarial loss 21,941 20,238
Benefits paid (10,024) (10,413)
Change in currency exchange rates (19,931) 11,722
------------------ -----------------
Balance at end of year $ 273,158 $ 262,480
================== =================
Change in plan assets:
Fair value at beginning of year $ 188,659 $ 158,923
Actual return on plan assets 47,951 21,291
Employer contributions 9,136 10,027
Participants' contributions 1,308 1,132
Benefits paid (10,024) (10,413)
Change in currency exchange rates (13,788) 7,699
------------------ -----------------
Fair value at end of year $ 223,242 $ 188,659
================== =================
Funded status:
Plan assets under projected benefit obligations $ (49,916) $ (73,821)
Unrecognized:
Actuarial loss 68,559 91,682
Prior service cost 2,852 3,407
------------------ -----------------
Total prepaid pension cost $ 21,495 $ 21,268
================== =================
Accumulated benefit obligation $ 270,120 $ 260,273
================== =================
Amounts recognized in balance sheets:
Intangible pension asset $ - $ 3,407
Noncurrent prepaid pension cost 22,337 10,531
Current pension liability (5,353) (5,285)
Noncurrent pension liability (58,450) (77,515)
Accumulated other comprehensive loss 62,961 90,130
------------------ -----------------
$ 21,495 $ 21,268
================== =================
As of December 31, 2005, the Company's European defined benefit pension
plans have accumulated benefit obligations totaling $190.7 million, which are in
excess of fair value of plan assets of $138.5 million. As of December 31, 2004,
all of the Company's defined benefit pension plans have accumulated benefit
obligations in excess of fair value of plan assets.
The components of the net periodic pension expense are set forth below:
Year ended December 31,
-------------------------------------------------------
2005 2004 2003
---------------- ---------------- ----------------
(In thousands)
Service cost $ 3,728 $ 3,308 $ 2,858
Interest cost 13,656 12,646 11,087
Expected return on plan assets (14,833) (13,098) (9,504)
Amortization of unrecognized prior service cost 556 489 576
Amortization of net losses 4,796 4,357 3,875
---------------- ---------------- ----------------
Net pension expense $ 7,903 $ 7,702 $ 8,892
================ ================ ================
The Company used the following discount rate, long-term rate of return
("LTRR") and salary rate increase weighted-average assumptions to arrive at the
aforementioned benefit obligations and net periodic expense:
Significant assumptions used to calculate projected and accumulated
benefit obligations at December 31,
-------------------------------------------------------------------------------------------
2005 2004
--------------------------------------------- ------------------------------------------
Discount Salary increase Discount Salary
rate LTRR rate LTRR increase
-------------- ------------- ---------------- ------------- -------------- -------------
U.S. plan 5.50% 10.00% n/a 5.65% 10.00% n/a
U.K. plan 4.75% 6.70% 3.25% 5.30% 7.10% 3.25%
Savoie plan 5.25% 3.47% 2.50% 5.30% 5.25% 2.50%
Significant assumptions used to calculate net periodic pension expense
for the year ended December 31,
-------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- --------------------------- ----------------------------
Discount Discount Discount
rate LTRR rate LTRR rate LTRR
-------------- ------------- -------------- ------------ -------------- -------------
U.S. plans 5.65% 10.00% 6.00% 10.00% 6.25% 8.50%
U.K. plan 5.30% 7.10% 5.50% 7.10% 5.70% 6.70%
Savoie plan 5.30% 5.25% 5.50% 5.25% 5.70% 6.00%
The Company currently expects to make cash contributions of approximately
$8.5 million, principally in the U.K., to its defined benefit pension plans
during 2006.
The U.S. plan(s) paid benefits of approximately $5.6 million in 2005, $5.7
million in 2004 and $5.6 million in 2003, and the U.K. plan paid benefits of
approximately $4.3 million in 2005, $4.7 million in 2004 and $4.3 million in
2003. Benefits paid under the Savoie plan were less than $0.1 million for each
of 2005, 2004 and 2003. Based upon current projections, the Company believes the
plans will be required to pay the following benefits over the next ten years:
Projected retirement benefits
-----------------------------------------------------------
U.S. Plan U.K.Plan Total
---------------- ----------------- -----------------
(In thousands)
Year ending December 31,
2006 $ 5,872 4,270 $ 10,142
2007 $ 5,902 4,387 $ 10,289
2008 $ 5,910 4,508 $ 10,418
2009 $ 5,902 4,632 $ 10,534
2010 $ 5,877 4,760 $ 10,637
2011 through 2015 $ 29,397 25,839 $ 55,236
The assets of the defined benefit pension plans are invested as follows:
December 31,
---------------------------------------
2005 2004
------------------ -----------------
US plan:
Equity securities 93.2% 84.3%
Debt securities 3.5% 14.1%
Cash and other 3.3% 1.6%
------------------ -----------------
100.0% 100.0%
================== =================
European plans:
Equity securities 84.6% 86.9%
Debt securities 15.4% 13.1%
------------------ -----------------
100.0% 100.0%
================== =================
During the second quarter of 2003, the Company transferred all of its U.S.
plans' assets into the CMRT; however, the Company's plan assets are invested
only in the portion of the CMRT that does not hold TIMET common stock. The
CMRT's long-term investment objective is to provide a rate of return exceeding a
composite of broad market equity and fixed income indices (including the S&P 500
and certain Russell indices) utilizing both third-party investment managers as
well as investments directed by Mr. Simmons. During the 18-year history of the
CMRT through December 31, 2005, the average annual rate of return earned by the
CMRT, as calculated based on the average percentage change in the CMRT's net
asset value per CMRT unit for each applicable year, has been 14% (with a 36%
return for 2005). Such parties have in the past, and may again in the future,
periodically change the relative asset mix based upon, among other things,
advice they receive from third-party advisors and their expectation as to what
asset mix will generate the greatest overall return.
During 2003, the trustees for the U.K. plan selected a new investment
advisor (effective in 2004) for the U.K. plan and modified its asset allocation
goals. The Company's future expected long-term rate of return on plan assets for
its U.K. plan is based on an asset allocation assumption of 80% equity
securities and 20% fixed income securities by the end of 2006 and 75% equity
securities and 25% fixed income securities by the end of 2007, and all current
contributions to the plan, net of benefits paid, are invested wholly in fixed
income securities in order to gradually effect the shift.
Postretirement benefits other than pensions. The Company provides certain
health care and life insurance benefits on a cost-sharing basis to certain of
its U.S. retirees and certain of its active U.S. employees upon retirement, for
whom health care coverage generally terminates once the retiree (or eligible
dependent) becomes Medicare-eligible or reaches age 65, effectively limiting
coverage for these participants to less than ten years based on TIMET's minimum
retirement age. The Company also provides certain postretirement health care and
life insurance benefits on a cost sharing basis to closed groups of certain of
its U.S. retirees, for whom health care coverage generally reduces once the
retiree (or eligible dependent) becomes Medicare-eligible, but whose coverage
continues until death. The Company funds such benefits as they are incurred, net
of any contributions by the retirees.
The plan under which these benefits are provided is unfunded, and
contributions to the plan during the year equal benefits paid. The components of
accumulated OPEB obligations and periodic OPEB cost, based on a December 31
measurement date, are set forth in the following tables:
December 31,
---------------------------------------
2005 2004
------------------ -----------------
(In thousands)
Actuarial present value of accumulated OPEB obligations:
Balance at beginning of year $ 34,441 $ 28,584
Service cost 661 540
Interest cost 1,652 1,780
Actuarial (gain) loss (3,614) 6,062
Participant contributions 1,131 1,266
Benefits paid (3,446) (3,791)
------------------ -----------------
Balance at end of year 30,825 34,441
Unrecognized net actuarial loss (15,027) (19,621)
Unrecognized prior service cost 1,963 2,427
------------------ -----------------
Total accrued OPEB cost 17,761 17,247
Less current portion 2,181 2,777
------------------ -----------------
Noncurrent accrued OPEB cost $ 15,580 $ 14,470
================== =================
Year ended December 31,
-------------------------------------------------
2005 2004 2003
-------------- -------------- -------------
(In thousands)
Service cost $ 661 $ 540 $ 487
Interest cost 1,652 1,780 1,722
Amortization of unrecognized prior service cost (464) (464) (464)
Amortization of net losses 980 1,120 956
-------------- -------------- -------------
Net OPEB expense $ 2,829 $ 2,976 $ 2,701
============== ============== =============
The Company used the following weighted-average discount rate and health
care cost trend rate ("HCCTR") assumptions to arrive at the aforementioned
benefit obligations and net periodic expense:
Significant assumptions used to calculate
accumulated OPEB obligation at December 31,
----------------------------------------------------------------
2005 2004
---------------------------- -----------------------------
Discount rate 5.50% 5.65%
Beginning HCCTR 8.23% 9.29%
Ultimate HCCTR 4.00% 4.00%
Ultimate year 2010 2010
Significant assumptions used to calculate net periodic
OPEB expense for the year ended December 31,
------------------------------------------------------------------------------
2005 2004 2003
----------------------- ----------------------- ----------------------
Discount rate 5.65% 6.00% 6.25%
Beginning HCCTR 9.29% 10.35% 11.35%
Ultimate HCCTR 4.00% 4.00% 4.25%
Ultimate year 2010 2010 2010
If the HCCTR were increased by one percentage point for each year, the
aggregate of the service and interest cost components of OPEB expense would have
increased approximately $0.3 million in 2005, and the actuarial present value of
accumulated OPEB obligations at December 31, 2005 would have increased
approximately $3.2 million. If the HCCTR were decreased by one percentage point
for each year, the aggregate of the service and interest cost components of OPEB
expense would have decreased approximately $0.3 million in 2005, and the
actuarial present value of accumulated OPEB obligations at December 31, 2005
would have decreased approximately $3.5 million.
Based upon current projections, the Company will be required to pay the
following OPEB benefits over the next ten years:
Projected Projected Projected Projected net
gross payments retiree Part D payments
contributions subsidy
---------------- ------------------ ---------------- -----------------
(In thousands)
Year ended December 31,
2006 $ 3,767 (1,394) (199) $ 2,174
2007 $ 4,001 (1,481) (410) $ 2,110
2008 $ 4,270 (1,577) (439) $ 2,254
2009 $ 4,570 (1,693) (471) $ 2,406
2010 $ 4.821 (1,785) (501) $ 2,535
2011 through 2015 $ 28,983 (10,784) (3,012) $ 15,187
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare Act of 2003") introduced a prescription drug benefit under
Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. In May 2004, the Financial Accounting Standards
Board ("FASB") issued FSP No. 106-2 which provides guidance on (i) accounting
for the effects of the Medicare Act of 2003 once the Company is able to
determine actuarial equivalency and (ii) various required disclosures.
During 2005, the Company determined that the benefits provided by its U.S.
health and welfare plan are actuarially equivalent to the Medicare Part D
benefit and therefore the Company is eligible for the federal subsidy provided
for by the Medicare 2003 Act. The effect of such subsidy, which was accounted
for prospectively from the date actuarial equivalence was determined in
accordance with FASB Staff Position No. 106-2, resulted in a reduction in the
Company's actuarial present value of its accumulated OPEB obligation of $5.4
million at December 31, 2005 related to benefits attributed to past service and
a reduction in net periodic OPEB cost of $0.7 million in 2005 (reflecting a $0.1
million reduction in service cost, a $0.3 million reduction in interest cost and
a $0.3 million reduction in amortization of net losses).
Note 18 - Related party transactions
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (ii) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates such transactions, and understands
that Contran, Valhi and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more such
transactions in the future.
Under the terms of various intercorporate services agreements ("ISAs") that
the Company has historically entered into with various related parties,
employees of one company provide certain management, tax planning, financial,
risk management, environmental, administrative, facility or other services to
the other company on a fee basis. Such charges are based upon estimates of the
time devoted by the employees of the provider of the services to the affairs of
the recipient and the compensation of such persons, or the cost of facilities,
equipment or supplies provided. These ISAs are reviewed and approved by the
independent directors of the companies that are parties to the agreements.
In 2004, the Company, Tremont LLC (a wholly-owned subsidiary of Valhi) and
Contran agreed to enter into a single, combined ISA covering the provision of
services by Contran to TIMET and the provision of services by TIMET to Tremont
LLC and NL. Under the combined ISA, TIMET paid a net amount of $1.4 million
during 2005 and $1.2 million during 2004. The Company has extended this
agreement through 2006. Because Contran employees will in 2006 perform certain
executive and management functions previously performed by employees of the
Company, the Company expects to pay a net amount of $3.2 million under the ISA
during 2006.
In 2003, the Company had an ISA with Tremont LLC to provide certain
management, financial, environmental, human resources and other services to
Tremont LLC, under which Tremont LLC paid the Company approximately $0.2
million.
During 2003, the Company had an ISA with NL, a majority-owned subsidiary of
Valhi, whereby NL provided certain financial and other services to TIMET at a
cost to TIMET of approximately $15,000. In 2004, the ISA with NL was combined
with the ISA with Contran.
In 2003, the Company entered into an ISA with Contran whereby Contran
provided certain business, financial and other services to TIMET. During 2003,
TIMET paid Contran approximately $0.3 million related to this agreement.
The Company previously extended market-rate loans to certain officers
pursuant to a Board-approved program to facilitate the officers' purchase of
Company stock and BUCS and to pay applicable taxes on shares of restricted
Company stock as such shares vested. The Company terminated this program
effective July 30, 2002, subject to continuing only those loans outstanding at
that time in accordance with their then-current terms. The loans were generally
payable in five annual installments beginning six years from date of loan and
bore interest at a rate tied to the Company's borrowing rate, payable quarterly.
At December 31, 2005, all officer loans had been repaid to the Company in full.
In 2004, the Company entered into an agreement with Waste Control
Specialists LLC ("WCS"), a wholly owned subsidiary of Valhi, for the removal of
certain waste materials from the Company's Henderson plant site. During 2005,
TIMET paid $1.3 million to WCS for the removal of such materials, and TIMET
currently expects to pay an additional $0.7 million to WCS in 2006 for
completion of this removal, which is accrued in the Company's current
environmental obligations.
Tall Pines Insurance Company ("Tall Pines") (including a predecessor
company, Valmont Insurance Company) and EWI RE, Inc. ("EWI") provide for or
broker insurance policies for Contran and certain of its subsidiaries and
affiliates, including the Company. Tall Pines is a wholly owned subsidiary of
Valhi, and EWI is a wholly owned subsidiary of NL. Consistent with insurance
industry practices, Tall Pines and EWI receive commissions from the insurance
and reinsurance underwriters and/or assess fees for the policies that they
provide or broker. The Company's aggregate premiums for such policies were
approximately $4.7 million in 2005 and $2.3 million in 2004 and 2003. Tall Pines
purchases reinsurance for substantially all of the risks it underwrites. The
Company expects that these relationships with Tall Pines and EWI will continue
in 2006.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities that have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justify the risk associated
with the potential for any uninsured loss.
TIMET supplies titanium strip to VALTIMET under a long-term contract. The
LTA was entered into in 1997 and expires in 2007. Under the LTA, TIMET has
agreed to provide a certain percentage of VALTIMET's titanium requirements at
formula-determined selling prices, subject to certain conditions. Certain
provisions of this contract have been amended in the past and may be amended in
the future to meet changing business conditions. Sales to VALTIMET were $30
million in 2005, $21 million in 2004 and $9 million in 2003. Additionally,
VALTIMET converts TIMET-owned material into welded tube for TIMET on a purchase
order basis. Payments by TIMET to VALTIMET for such services totaled $1.8
million in 2005, $1.7 million in 2004, and $2.1 million in 2003.
Tremont LLC owns 32% of BMI. Among other things, BMI provides utility
services (primarily water distribution, maintenance of a common electrical
facility and sewage disposal monitoring) to the Company and other manufacturers
within an industrial complex located in Henderson, Nevada. Power transmission
and sewer services are provided on a cost reimbursement basis, similar to a
cooperative, while water delivery is currently provided at the same rates as are
charged by BMI to an unrelated third party. Amounts paid by the Company to BMI
for these utility services were $1.4 million during 2005, $1.3 million during
2004 and $1.2 million during 2003. The Company also paid BMI an electrical
facilities upgrade fee of $0.8 million in 2005, and $1.3 million in each of 2004
and 2003. This fee continues at $0.8 million annually for 2006 through 2009 and
terminates completely after January 2010.
Based on the previous agreements and relationships, receivables from and
payables to related parties (aggregated in accounts and other receivables and
other current liabilities, respectively) included in the Company's Consolidated
Balance Sheets are summarized in the following table:
December 31,
--------------------------------------
2005 2004
----------------- -----------------
(In thousands)
Receivables from related parties:
VALTIMET $ 7,080 $ 2,264
Notes receivable from officers - 49
----------------- -----------------
$ 7,080 $ 2,313
================= =================
Payables to related parties:
VALTIMET $ 1,556 $ 863
Kronos 7 15
----------------- -----------------
$ 1,563 $ 878
================= =================
Note 19 - Commitments and contingencies
Long-term agreements. The Company has LTAs with certain major customers,
including, among others, Boeing, Rolls-Royce plc and its German and U.S.
affiliates ("Rolls-Royce"), United Technologies Corporation ("UTC", Pratt &
Whitney and related companies), Societe Nationale d'Etude et de Construction de
Moteurs d'Aviation ("Snecma"), Wyman-Gordon (a unit of Precision Castparts
Corporation ("PCC")) and VALTIMET. These agreements expire from 2007 through
2012, are subject to certain conditions, and generally provide for (i) minimum
market shares of the customers' titanium requirements or firm annual volume
commitments, (ii) formula-determined prices (although some contain elements
based on market pricing) and (iii) price adjustments for certain raw material
and energy cost fluctuations. Generally, the LTAs require the Company's service
and product performance to meet specified criteria and contain a number of other
terms and conditions customary in transactions of these types. In certain events
of nonperformance by the Company or the customer, the LTAs may be terminated
early. Although it is possible that some portion of the business would continue
on a non-LTA basis, the termination of one or more of the LTAs could result in a
material effect on the Company's business, results of operations, financial
position or liquidity. The LTAs were designed to limit selling price volatility
to the customer, while providing TIMET with a committed base of volume
throughout the aerospace business cycles.
During 2001, the Company recorded a charge of $3.0 million relating to a
titanium sponge supplier's agreement to renegotiate certain components of an
agreement entered into in 1997, including minimum purchase commitments for 1999
through 2001. The $0.6 million accrued and unpaid balance as of December 31,
2004 was paid during 2005. In September 2002, the Company entered into a new
agreement with this supplier, effective from January 1, 2002 through December
31, 2007. This new agreement replaced the 1997 agreement. The new agreement
requires minimum annual purchases by the Company of approximately $38 million in
2006 and $34 million in 2007.
Concentration of credit and other risks. Substantially all of the Company's
sales and operating income (loss) are derived from operations based in the U.S.,
the U.K., France and Italy. As shown in the below table, the Company generates
over half of its sales revenue from sales to the commercial aerospace sector. As
described previously, the Company has LTAs with certain major aerospace
customers, including Boeing, Rolls-Royce, UTC, Snecma and Wyman-Gordon. This
concentration of customers may impact the Company's overall exposure to credit
and other risks, either positively or negatively, in that all of these customers
may be similarly affected by the same economic or other conditions. The
following table provides supplemental sales revenue information regarding the
Company's dependence on the commercial aerospace sector and certain customer
relationships:
Year ended December 31,
--------------------------------------------------
2005 2004 2003
--------------- -------------- -------------
(Percentage of total sales revenue)
Sales revenue to:
Commercial aerospace sector 57% 57% 57%
=============== ============= ==============
Customers under LTAs 49% 44% 41%
=============== ============= ==============
Significant customers under LTAs (1):
Rolls-Royce and other Rolls-Royce suppliers (2) 12% 15% 15%
=============== ============= ==============
Ten largest customers 45% 48% 44%
=============== ============= ==============
Significant customers (1):
PCC and related entities 13% 13% 13%
=============== ============= ==============
--------------------------------------------------------------------------------------------------------------------
(1) Greater than 10% of net sales.
(2) Includes direct sales to certain of the PCC-related entities under the
terms of the Rolls-Royce LTAs.
The availability of certain of the Company's raw materials (titanium sponge
and titanium scrap) has tightened during the past several quarters, and,
consequently, the prices for such raw materials have increased. To the extent
that this trend continues, the Company could be limited in its ability to
produce enough titanium products to fully meet customer demand. In addition,
during 2005, certain of the Company's LTAs limited the Company's ability to pass
on all of its increased raw material costs. However, the Company's ability to
offset increased material costs with higher selling prices should increase in
2006, as many of the Company's LTAs have either expired or have been
renegotiated for 2006 with price adjustments that take into account raw material
cost fluctuations.
Operating leases. The Company leases certain manufacturing and office
facilities and various equipment. Most of the leases contain purchase and/or
various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that leases will be renewed or
replaced by other leases in the normal course of business. Net rent expense was
$5.1 million in 2005, $3.9 million in 2004 and $4.0 million in 2003.
At December 31, 2005, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
Amount
--------------------
(In thousands)
Year ending December 31,
2006 $ 3,103
2007 3,363
2008 2,640
2009 2,260
2010 2,219
2011 and thereafter 18,512
--------------------
$ 32,097
====================
Environmental matters. TIMET and BMI entered into an agreement in 1999
which provided that upon payment by BMI of the cost to design, purchase and
install the technology and equipment necessary to allow the Company to stop
discharging liquid and solid effluents and co-products into settling ponds
located on certain lands owned by the Company adjacent to its Henderson, Nevada
plant site (the "TIMET Pond Property"), the Company would convey the TIMET Pond
Property to BMI, at no additional cost. In November 2004, the Company and BMI
entered into several agreements that superceded the 1999 agreement. Under these
new agreements, the Company conveyed the TIMET Pond Property to BMI in exchange
for (i) $12 million cash, (ii) BMI's assumption of the liability for certain
environmental issues associated with the TIMET Pond Property, including certain
possible groundwater issues for which the Company currently has $0.6 million
accrued, and (iii) an additional $1.2 million cash payment received from BMI in
June 2005.
The Company is also continuing assessment work with respect to its own
active plant site in Henderson, Nevada. The Company currently has $2.5 million
accrued based on the undiscounted cost estimates of the probable costs for
remediation of these sites, which includes an increase in the accrual of $0.5
million during 2005 related to specific future remediation costs which the
Company now considers probable. The Company expects these accrued expenses to be
paid over a period of up to thirty years.
At December 31, 2005, the Company had accrued an aggregate of approximately
$3.2 million for environmental matters, including those discussed above. The
upper end of the range of reasonably possible costs to remediate these matters
is approximately $5.4 million. The Company records liabilities related to
environmental remediation obligations when estimated future costs are probable
and reasonably estimable. Such accruals are adjusted as further information
becomes available or circumstances change. Estimated future costs are not
discounted to their present value. It is not possible to estimate the range of
costs for certain sites. The imposition of more stringent standards or
requirements under environmental laws or regulations, the results of future
testing and analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in costs in excess of amounts
currently estimated to be required for such matters. No assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
Legal proceedings. At December 31, 2005, the Company had accrued less than
$0.1 million for expected legal settlement costs. The Company records
liabilities related to legal proceedings when estimated costs are probable and
reasonably estimable. Such accruals are adjusted as further information becomes
available or circumstances change. Estimated future costs are not discounted to
their present value. It is not possible to estimate the range of costs for
certain matters. No assurance can be given that actual costs will not exceed
accrued amounts or that costs will not be incurred with respect to matters as to
which no problem is currently known or where no estimate can presently be made.
Further, there can be no assurance that additional legal proceedings will not
arise in the future.
Other. The Company has entered into letters of credit to collateralize (i)
potential workers' compensation claims in Ohio and Nevada and (ii) future usage
of electricity in Nevada. As of December 31, 2005, the outstanding amounts for
such letters of credit, which reduce the Company' excess availability under its
U.S. credit agreement, were $2.3 million and $2.1 million, respectively.
TIMET is the primary obligor on two $1.5 million workers' compensation
bonds issued on behalf of a former subsidiary, Freedom Forge Corporation
("Freedom Forge"), which TIMET sold in 1989. Freedom Forge filed for Chapter 11
bankruptcy protection on July 13, 2001, and discontinued payment on the
underlying workers' compensation claims in November 2001. During 2002, TIMET
received notices that the issuers of the bonds were required to make payments on
the first bond with respect to certain of these claims and were requesting
reimbursement from TIMET. As of December 31, 2005, the Company has made
aggregate payments under the two bonds of $1.5 million, and $0.2 million remains
accrued for future payments. TIMET may revise its estimated liability under
these bonds in the future as additional facts become known or claims develop.
The Company is involved in various employment, environmental, contractual,
product liability, general liability and other claims, disputes and litigation
incidental to its business including those discussed above. In several
instances, the Company believes it has insurance coverage to eliminate any risk
of loss (other than standard deductibles, which generally are less tha $1
million). The Company currently believes that the outcome of these matters,
individually and in the aggregate, will not have a material adverse effect on
the Company's financial position, liquidity or overall trends in results of
operations. However, all such matters are subject to inherent uncertainties, and
were an unfavorable outcome to occur with respect to several of these matters in
a given period, it is possible that it could have a material adverse impact on
the results of operations or cash flows in that particular period. In cases
where these employment, environmental, contractual, product liability, general
liability and other clams, disputes and litigation involve matters that the
Company has concluded the risk of loss is not probable, but is more than remote,
the Company believes the range of loss, to the extent the Company is able to
reasonably estimate a range of loss, would be limited at the high end to the
Company's standard insurance deductibles.
Note 20 - Earnings per share
Basic earnings (loss) per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings
(loss) per share attributable to common stockholders reflects the dilutive
effect of common stock options, restricted stock and the assumed conversion of
the BUCS and the Series A Preferred Stock, if applicable. A reconciliation of
the numerator and denominator used in the calculation of basic and diluted
earnings (loss) per share is presented in the following table:
Year ended December 31,
-----------------------------------------------------
2004 2003
2005 (restated) (restated)
-------------- -------------- ----------------
(In thousands)
Numerator:
Net income (loss) attributable to
common stockholders $ 143,701 $ 43,300 $ (24,443)
Interest expense on BUCS (net of tax) 310 -- -
Dividends on Series A Preferred Stock 12,244 4,398 -
-------------- -------------- ----------------
Diluted net income (loss) attributable
to common stockholders $ 156,255 $ 47,698 $ (24,443)
============== ============== ================
Denominator:
Average common shares outstanding 65,391 63,525 63,374
Average dilutive stock options and
restricted stock 365 266 -
BUCS 310 - -
Series A Preferred Stock 24,790 8,711 -
-------------- -------------- ----------------
Diluted shares 90,856 72,502 63,374
============== ============== ================
For the years ended December 31, 2004 and 2003, the conversion of the BUCS
was antidilutive. Stock options to purchase 244,000 shares of common stock
during 2005, 1,252,400 shares during 2004 and 2,193,000 shares during 2003 were
excluded from the calculation of diluted earnings (loss) per share because the
exercise price for such options was greater than the average market price of the
common shares and such options were therefore antidilutive during the respective
period. An additional 183,740 incremental stock options and restricted shares
were excluded from the 2003 calculation because they were antidilutive due to
the loss for that year.
Note 21 - Business segment information
The Company's production facilities are located in the United States,
United Kingdom, France and Italy, and its products are sold throughout the
world. The Company's Chief Executive Officer is the Company's chief operating
decision maker ("CODM") as that term is defined in SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The CODM receives
financial information about TIMET from which he makes decisions concerning
resource utilization and performance analysis only on a global, consolidated
basis. Based upon this level of decision-making, the Company currently has one
segment, its worldwide "Titanium melted and mill products" segment. Sales, gross
margin, operating income (loss), inventory and receivables are the key
management measures used to evaluate segment performance. The following table
provides segment information supplemental to the Company's Consolidated
Financial Statements:
Year ended December 31,
-----------------------------------------------------------
2005 2004 2003
----------------- ----------------- ----------------
(In thousands, except product shipment data)
Titanium melted and mill products:
Melted product net sales $ 112,252 $ 72,092 $ 57,409
Mill product net sales 528,555 364,248 279,563
Other product sales 108,970 65,488 55,132
Other (1) - - (6,800)
----------------- ----------------- ----------------
$ 749,777 $ 501,828 $ 385,304
================= ================= ================
Melted product shipments:
Volume (metric tons) 5,655 5,360 4,725
Average price ($ per kilogram) $ 19.85 $ 13.45 $ 12.15
Mill product shipments:
Volume (metric tons) 12,660 11,365 8,875
Average price ($ per kilogram) $ 41.75 $ 32.05 $ 31.50
Geographic segments:
Net sales - point of origin:
United States $ 512,313 $ 325,857 $ 277,947
United Kingdom 201,936 154,535 111,313
France 91,610 57,942 44,877
Other Europe 46,525 29,744 30,566
Other (1) - - (6,800)
Eliminations (102,607) (66,250) (72,599)
----------------- ----------------- ---------------
$ 749,777 $ 501,828 $ 385,304
================= ================= ===============
Net sales - point of destination:
United States $ 422,143 $ 277,317 $ 217,653
United Kingdom 136,638 100,081 76,086
France 87,811 55,959 43,410
Other locations 103,185 68,471 54,955
Other (1) - - (6,800)
----------------- ----------------- ---------------
$ 749,777 $ 501,828 $ 385,304
================= ================= ===============
Long-lived assets - property and equipment, net:
United States $ 193,623 $ 165,661 $ 170,400
United Kingdom 53,576 56,255 62,287
Other Europe 5,791 6,257 6,495
----------------- ----------------- ---------------
$ 252,990 $ 228,173 $ 239,182
================= ================= ===============
-------------------------------------------------------------------------------------------------------------------
(1) Represents the effect of a $6.8 million reduction to sales during 2003
related to termination of a purchase and sale agreement with Wyman-Gordon.
See further discussion in Note 9.
Export sales from U.S.-based operations approximated $54 million in 2005
and $16 million in each of 2004 and 2003.
Note 22 - Quarterly results of operations (unaudited)
For the quarter ended
----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------- -------------- ------------- -------------
(In millions, except per share data)
Year ended December 31, 2005:
Net sales $ 155.2 $ 183.7 $ 190.0 $ 220.8
Gross margin $ 29.0 $ 47.9 $ 55.7 $ 66.8
Operating income $ 19.4 $ 36.9 $ 51.7 $ 63.0
Net income attributable to
common stockholders $ 38.1 $ 33.6 $ 33.4 $ 38.6
Basic earnings per share attributable to
common stockholders $ 0.60 $ 0.53 $ 0.51 $ 0.56
Diluted earnings per share attributable to
common stockholders $ 0.46 $ 0.41 $ 0.40 $ 0.45
Year ended December 31, 2004 (restated):
Net sales $ 120.5 $ 124.1 $ 120.2 $ 137.0
Gross margin $ 12.8 $ 17.0 $ 14.7 $ 19.2
Operating (loss) income $ 3.3 $ 8.5 $ 13.5 $ 17.8
Net (loss) income attributable to
common stockholders $ (1.2) $ 3.4 $ 25.2 $ 15.9
Basic (loss) earnings per share attributable to
common stockholders $ (0.02) $ 0.05 $ 0.40 $ 0.25
Diluted (loss) earnings per share attributable to
common stockholders $ (0.02) $ 0.05 $ 0.36 $ 0.21
-------------------------------------------------------------------------------------------------------------------
Note 1 - The sum of quarterly amounts may not agree to the full year results
due to rounding.
Note 2 - The quarter ended December 31, 2004 has been restated for the change
in accounting from LIFO to specific identification.
Note 23 - Subsequent event
In January 2006, the Company announced its plans to relocate and
consolidate the corporate functions currently performed in Denver, Colorado to
Dallas, Texas or its operating facility in Morgantown, Pennsylvania. The
Company's estimate of the cost of this relocation, consisting of lease
termination and employee severance costs, is approximately $3.4 million and will
be recognized during 2006.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Titanium Metals Corporation:
Our audits of the consolidated financial statements, of management's
assessment of the effectiveness of internal control over financial reporting and
of the effectiveness of internal control over financial reporting referred to in
our report dated March 24, 2006 appearing in this Annual Report on Form 10-K
also included an audit of the financial statement schedule listed in the index
on page F of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
March 24, 2006
TITANIUM METALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
-----------------------------
Balance Charged
at to Charged Balance
beginning costs and to other at end
Description of year expenses accounts Deductions of year
------------------------------------- ------------ ------------- ------------ ------------- ------------
Year ended December 31, 2005:
Allowance for doubtful accounts $ 1,683 $ 923 $ (61) (1) $ (562) (2) $ 1,983
============ ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 16,989 $ (2,770) $ (1,006) (1) $ - $ 13,213
============ ============= ============ ============= ============
Year ended December 31, 2004:
Allowance for doubtful accounts $ 1,906 $ 250 $ 65(1) $ (538)(2) $ 1,683
============ ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 16,723 $ (456) $ 722(1) $ - $ 16,989
============ ============= ============ ============= ============
Year ended December 31, 2003:
Allowance for doubtful accounts $ 2,386 $ 623 $ 144 (1) $ (1,247) (2) $ 1,906
============ ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 15,090 $ 508 $ 1,125 (1) $ - $ 16,723
============ ============= ============ ============= ============
Reserve for restructuring $ 80 $ - $ - $ (80) (3) $ -
============ ============= ============ ============= ============
----------------------------------------------------------------------------------------------------------------------
(1) Amounts represent foreign currency translation adjustments for the related
account.
(2) Amounts written off and reductions in reserve, less recoveries.
(3) Amount represents cash payments for restructuring severance obligations and
credits to reduce the initial restructuring charge.